Going Under - Needs Bailout !
African Bank Rescue Evades Key Questions
15 AUG 2014 ; LYNLEY DONNELLY
Analysts have asked why regulators did not act sooner to avert the African Bank crisis.
African Bank Investments Limited’s sudden demise last week left few market players unscathed. Shareholders, in particular, got soaked in the bloodbath that preceded the company’s rescue by the South African Reserve Bank on Sunday.
The regulators moved swiftly to maintain confidence in the local financial system, but there are several questions about the lifeline the central bank threw to African Bank. Why did it have to be bailed out ? And why did the regulators not act sooner to defuse the ticking time bomb that the bank had become ?
Reserve Bank Governor Gill Marcus announced that the bank will be put under the curatorship of Tom Winterboer of PwC. It will be split in two: a “good” bank with a loan book value of R26-billion, which will be recapitalised by R10-billion, underwritten by a consortium of private sector banks and the Public Investment Corporation (PIC); and a “bad” bank, with a book value of R17-billion, which the Reserve Bank will take over and buy for R7-billion.
Retail depositors, a mere 1% of the bank’s creditors, will be fully covered in the transfer to the good bank. But other creditors, chiefly the bondholders, will lose 10% of the value of their investment. Shareholders and subordinated debt holders will get nothing but the opportunity to participate in the new bank.
African Bank’s ill-fated retail furnisher business, Ellerines, a R70-million-a-month drain on the holding company and African Bank, has been placed in business rescue.
Bad Business Model
The bank’s business model was a contributing factor to its financial woes, according to Byron Lotter, the portfolio manager of Vestact. Unlike other banks, it took almost no deposits but raised funds on local and international capital markets, which it then lent to consumers as unsecured credit at high interest rates.
In response to increased competition in the unsecured market, African Bank aggressively expanded their lending, but when tough economic conditions hit lower end consumers non-performing loans soared Lotter said.
Restoring faith in the broader financial system was a key issue, Wayne McCurrie of Momentum Wealth said. The bank’s debt is widely held in the financial system by other banks, pension funds and money market unit trusts, he said.
Had the bank not been bailed out, it could have compromised the value of the bank’s good book, affecting its ability to raise funds in the future, he said. Besides local debt, it has issued bonds internationally, the most recent being in February when it issued 175-million Swiss francs (slightly more than R2-billion) on the SIX Swiss exchange.
It is also not clear how the debt write-downs will take place, Peter Attard Montalto, an analyst at Nomura, said in a research note, especially for foreign investors holding the bank’s Swiss franc and United States dollar denominated debt. It will be part of the good bank but interest payments have been frozen for the foreseeable future, he noted. It appears the 10% write-down will be on the principal but it may also be on the interest payments, he said.
On Wednesday, ratings agency Moody’s downgraded the bank’s credit rating to Caa2 and placed it on review for a further downgrade.
Another source of funding was money market instruments, which also face a 10% cut.
Jurgen Boyd, the deputy executive officer of the Financial Services Board (FSB), said 15 Money Market Funds, out of a total of 43, held African Bank paper. With total assets valued at R270-billion, 1.3% were exposed to the bank. The FSB has instructed them to write down 10% of this exposure immediately, in effect pricing in the impact of its decline, Boyd said.
Fitch Ratings downgraded Absa’s Money Market fund on Wednesday. Fitch also placed another five funds including money market funds from Investec and Nedgroup Investments, as well as Stablib’s Extra Income Fund, on a negative ratings watch, because of their exposure to the bank. Of the local money market funds rated, Absa has the highest, longest-term exposure to African Bank, it said.
But shareholders were the biggest losers. The share price plunged more than 90% in two days. The largest included the PIC, whose equity exposure was 15%, and it held 6% of bank-issued bonds. Others included a number of high-profile asset managers, such as Coronation and Liberty Life’s Stanlib. Stanlib held 8% of the issued shares on behalf of its clients and had exposure to equity, bonds and debt, it said, but these were very small in relation to the total funds under management of R560-billion.
Serious questions still remain about how things got so bad, despite the bank management’s reassurances in recent months. Following a R5.5-billion rights issue last year to recapitalise the loss-making bank, its management was adamant it could return to profitability. This changed after its shock trading update last week, revealing that it faced R7.6-billion in losses and needed a further R8.5-billion from the market, sparking its share price plunge.
Montalto asked why the regulators did not do more, and sooner. The Reserve Bank indicated that it had engaged the bank over its loan book, and the NCR should have acted in 2011 and 2012, when reckless lending at the bank was building up, he said.
The Reserve Bank should also have rejected the bank’s purchase of Ellerines, which was “solely to further cement Abil’s [African Bank’s] undiversified business structure in providing more clients for unsecured credit”, he said.
The NCR said it had investigated the bank, noting the R20-million settlement it reached with the bank early this year. High levels of bad debt and credit impairment are not only caused by reckless behaviour but also by economic factors, which affect consumers’ ability to repay debt, it said. The
Reserve Bank and the treasury did not respond to requests for comment.
A previous version of this story suggested Stanlib’s money market fund had been placed on a negative ratings watch, when it was in fact Stanlib’s Extra Income Fund, which was placed on negative ratings watch. We regret the errorAnalysts have asked why regulators did not act sooner to avert the African Bank crisis.
African Bank has 2 Options
10 August 2014 15:01
There are really only two ways to save South Africa’s largest unsecured lender, African Bank Invest-ments Limited (Abil).
According to Liberty Holdings CEO Thabo Dloti, the bank will either be bought by one of the larger banks or investors will bravely stay the course after suffering hundreds of millions of rands in losses this week.
If shareholders can keep their heads, it’s possible they can recover from that eventually, Dloti said after the release of Liberty’s results.
Liberty Life Assurance is Abil’s second- largest shareholder.
The collapse of Abil’s share price this week was nothing short of spectacular after it released a hair-raising trading update on Wednesday.
Shell-shocked shareholders sold more than a third of the company by Friday, erasing R9.8 billion of Abil’s value.
On Tuesday evening, Abil was worth R10.3 billion – with shares trading at R6.88 each – a shadow of the R30 billion bank it was a few years ago.
On Wednesday, the bank announced the resignation of founder and CEO Leon Kirkinis with immediate effect, predicted a loss of at least R7.6 billion for this financial year and said it needed a minimum of R8.5 billion in new capital.
On Thursday, Abil announced that it was placing its loss-making furniture company, Ellerines, into business rescue – the first stop on the way to liquidation.
By end of trade on Friday, the bank was worth R450 million or 30c a share.
Abil is owed billions by poor customers to whom it has lent money with no security, but their incomes.
Of its R60 billion loan book, spread over 2.4 million debtors, R19 billion consists of “nonperforming loans”, meaning that clients had missed three months of repayments.
This situation is not improving fast enough despite a number of “derisking” initiatives.
Basically, Abil is reining in the most risky kind of lending it used to do by cutting the maximum loan amounts and the maximum repayment terms it used to offer.
In a conference call after the shocking update on Wednesday, chief financial officer Nithia Nalliah, who is now acting CEO, praised Kirkinis for building Abil “into the business it has been – until the recent past”.
Asked if Kirkinis was pushed, chairman Mutle Mogase replied he had offered to resign “a few times” before and “given the circumstances”, the board had now accepted.
Kirkinis and other board members shared the pain this week. Kirkinis owns about 1.47% of Abil, meaning his personal wealth just dropped by about R140 million. His Abil shares were worth about R150 million before the week’s announcements – now they are worth about R6.6 million.
Abil’s future hinges on first getting rid of Ellerines, raising a lot of money and then somehow splitting itself into two so that a “good bank” can be ring-fenced and salvaged.
Nalliah on Wednesday said the business case for unsecured lending still exists, although it would involve less risky lending than Abil has engaged in.
The largest of the shareholders that have just seen their investments evaporate is the Government Employees Pension Fund, which is managed by the Public Investment Corporation (PIC).
However, asset manager Coronation had invested more money into Abil via a number of funds under its control.
The second-largest loser is technically the two BEE schemes created by Abil in 2005 and 2008 (see boxes) which are now deep under water. Many of the major shareholders had pumped millions into Abil in December last year when it raised R5.5 billion in a rights issue – asking all existing sharehol-ders to buy extra new shares.
However, when Abil had to raise R5.5 billion, it was a R14 billion company.
Now that it needs another R8.5 billion, it is a R450 million company, making a sufficient injection by existing shareholders somewhat unlikely.
The PIC has reportedly demanded an urgent new turnaround plan within a week.
WHO TOOK A HIT
Asset manager Coronation’s funds own a collective 22% of Abil. The value of that stake was about R2.2 billion, but has now been reduced to about R100 million. Funds like the Coronation Top 20 Fund and the Coronation Balanced Plus Fund acquired most of their Abil shares in the past year.
The Government Employees Pension Fund is Abil’s largest shareholder with 12.4% at the end of last month. This stake was worth R1.28 billion on Tuesday, but only R55 million on Friday. The fund had increased its shareholding in Abil from 10.6% last year by buying shares in the December rights issue.
Liberty Life owns 5.2% of Abil. The stake’s value dropped from R534 million to R23 million this week.
Momentum is another shareholder that significantly increased its stake in Abil in the past year. The 2.1% it owned at the beginning of this week was worth R200 million, the amount then fell to about R9.5 million.
African Bank’s two BEE schemes, Eyomhlaba and Hlumisa, are now in the red and worth roughly minus R137 million.
The schemes were created in 2005 and 2008 and own 5% of Abil – down from about 9% before the rights issue late last year diluted them.
Their collective shares in Abil are now worth R40 million at best, but they collectively still owe about R177 million for the shares, which were bought with debt financing at prices of between R10 and R6.
Roughly 14 000 black shareholders own shares in the schemes, including several thousand Abil employees Eyomhlaba and Hlumisa have shares that are traded over the counter on special exchanges.
These have been relatively slow to react to the collapse of the underlying asset.
Since Abil’s announcements, Eyomhlaba shares have fallen from R4.56 to 99c.
Hlumisa shares fell from R2.56 to R1.75 – still reflecting a far higher value for Abil shares than what actual Abil shares are fetching in the market.
Abil’s woes may be coming to a mall near you after it announced that it was placing furniture group Ellerines under business rescue.
The group consists of 1 025 furniture stores that employ 7 790 people.
These fall under a number of ubiquitous South African brands – Ellerines, Furniture City, Dial-a-Bed, Wetherlys, Beares and Geen & Richards.
Abil bought Ellerines in 2008 for R9.2 billion. The premise was that people buying furniture on terms would get that credit from Abil.
In this week’s update, Abil announced that its retail division, which is essentially Ellerines, will suffer losses of “at least” R2.9 billion” in its current financial year – far worse than the loss of R328 million a year earlier.
Dewald van Rensburg and Moyagabo Maake - City Press