South Africa's R2.5 trillion debt capital market is in the midst of one of its most profound transformations in decades. The recent issuance of the first ZARONIA-linked bonds by Absa and Standard Bank has fired the starting gun on the transition away from the Johannesburg Interbank Average Rate (JIBAR), a move that will reshape everything from corporate debt to consumer loans.
Article by: Conway Williams - Head of Credit at Prescient Investment Management
As a longstanding investor in South Africa's Debt Capital Markets, we are not just witnessing this evolution; we are an active participant. The shift to the South African Rand Overnight Index Average (ZARONIA) is more than a technical adjustment—it represents a fundamental realignment with a post-LIBOR global financial system, prioritising transparency and stability. With JIBAR scheduled for cessation by the end of 2026, these first transactions are a critical test of the market's readiness for a new era.
The inaugural ZARONIA-linked bonds, while modest in scale, carry a significance that far outweighs their monetary value. Standard Bank's three-year bond, issued on 21 May 2025 at a 102-basis point margin, has established the first crucial pricing reference for this new benchmark. By stepping into this uncharted territory, these institutions have taken on the responsibility of building the infrastructure and precedents that will underpin the market's future.
These transactions serve two critical functions:
- Establishing a pricing foundation: Unlike JIBAR, which is based on indicative quotes, ZARONIA is calculated from actual overnight lending transactions. This transaction-based model provides a more robust and transparent data source, reducing the risk of manipulation that plagued older benchmarks like LIBOR.
- Testing market infrastructure: The successful listing and settlement of these bonds, following the JSE and Strate's confirmation of readiness on 19 May 2025 , demonstrate that the core technical infrastructure is in place. The true test, however, will come with higher issuance volumes and market stress.
A "wholesale reset"?
The transition is, as Baker McKenzie in its July 2025 publication , characterised it, "a wholesale legal, regulatory and operational reset for the industry." The complexities are significant and should not be underestimated.
From a legal standpoint, unlike syndicated loans, many existing bond agreements lack the fallback clauses needed to handle the cessation of a benchmark, creating potential legal uncertainties and potential valuation disputes. Operationally, the entire financial ecosystem—from asset managers to administrators—must upgrade systems and retrain staff.
A further point, on the regulatory front, the Financial Sector Conduct Authority (FSCA) removed a key barrier by issuing an exemption for money market funds. This allows them to invest in ZARONIA-linked instruments where the rate is calculated in arrears, a vital step to ensure deep market participation.
Market reception - gauging investor appetite
The initial reception from investors appears positive, but it is our view that it is too early to declare victory. The limited supply of these first issuances may have created a "novelty premium," and sustained investor demand will only become clear as the market matures and supply grows.
From our perspective as a systematic investment manager, the shift to ZARONIA offers clear opportunities. The enhanced transparency and closer alignment with the SARB's repo rate improve predictability, which benefits our systematic strategies.
However, the structural differences, namely, the absence of a built-in term and credit risk premium in the overnight ZARONIA rate, in our view, require a careful recalibration of our pricing models and risk management frameworks.
Looking ahead - measured expectations
We anticipate a gradual but accelerating adoption of ZARONIA across the South African credit market, driven by the immovable 2026 deadline. Corporate issuers will likely be compelled to adopt the new benchmark out of necessity, but many may come to prefer its transparency.
This transition aligns South Africa with global best practices, following the replacement of LIBOR in international markets. By doing so, we enhance the integrity of our markets and potentially reduce the basis risk for international investors, making South African credit a more attractive destination.
For domestic investors, the path forward requires careful navigation and an investment in time and resources to ensure that systems and risk frameworks are prepared. Readiness is an ongoing process and the transition period will undoubtedly present both unforeseen risks and unique opportunities.
The future South African credit market promises to be more transparent and robust. Realising that promise, however, depends not on the theoretical merits of ZARONIA, but on the collective success of our implementation.
Disclaimer
Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). No action should be taken on the basis of this information without first seeking independent professional advice.
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