Johannesburg - Denel would enter the local bond market to raise capital, the state-owned defence contractor announced on Saturday.

While the terms of the issue, including size and timing, had not been decided upon, an application had been made to list the bond on the Bond Exchange of SA, according to Thembi Tulwana, the corporate affairs director of Denel.

The move follows an award by Fitch Ratings of an AA investment grade debt rating to the company. This is Fitch's second-highest investment grade credit rating category for long-term domestic debt.

Tulwana said the company had mandated JP Morgan, Wip-capital and Investec, its ratings advisers, to lead manage its inaugural bond issue in the domestic bond market.

The AA rating reflected confidence in what had been achieved and the positive prospects for Denel going forward, and also re-confirmed the government's commitment to the future of the business, Tulwana said.

It was based on the significant progress made to restructure and refocus Denel around its core aerospace and ordnance businesses, and the strategic importance of Denel to the South African economy.

Denel will join parastatals Telkom and Eskom in the bond market, and the issue will be welcomed by market participants, who see the corporate debt market as an important way of maintaining market liquidity in the face of bond buy-backs by the central government.

Government debt is the mainstay of the local bond market, but better tax collection and fiscal constraint over the past few years have seen the state retiring more debt instruments than it issued.

This has the effect of reducing the amount of tradable debt in the market, contributing to the bond market's good performance.

Dawie Roodt, an economist with PLJ Financial Services, notes that by the end of June, only three months into the fiscal year, the state had already accumulated cash balances of over R24 billion, highlighting the fact that it did not need much funding to date.

He said funding pressure would fall even further in coming months as the government repaid capital market instruments that reached maturity and bought back other illiquid bonds.

With acknowledgements to Quentin Wray and Business Report.