Holdings of bonds in unsecured lenders ‘wind down’

Old Mutual's South African fixed-income investment unit said its development funds have halted purchases of bonds from unsecured lenders in the country because the high-interest credit they offer is hurting consumers.

Futuregrowth Asset Management will "wind down" its holdings of bonds in Capitec Bank, African Bank and other unsecured lenders over three to four years as the securities mature, said chief investment officer Andrew Canter, who helps oversee R128-billion.

"It's not a panic exit," he said, adding that the Old Mutual unit may hold R1-billion rand of the bonds. "From having the view that micro-lending was always a social good, now we're shifting and saying maybe not, maybe there’s damage being done," Canter said in an interview in Cape Town on Wednesday. "Nobody says it's their intention to cripple people, but de facto, that's what's happening."

New entrants to South Africa's unsecured lending market have reduced the price of credit, Carl Fischer, executive director of marketing and corporate affairs at Stellenbosch-based Capitec, said.

South African consumer borrowing not backed by assets surged fourfold to more than R120-billion in the three years to 2012, according to Macquarie Group, as lenders including Bayport Financial Services competed for low-income clients. With annual interest rates of as much as 60%, those customers are struggling to repay loans as increasing fuel and power prices pushed inflation to a four-year high in August.

Bad dynamic
"Even good players are being forced to do the wrong thing, offering clients more credit, to defend their clients from the bad players, so it's a bad dynamic," said Canter. "We're not saying the likes of Capitec or Bayport aren’t credit-worthy, we're just saying we don’t want to be lending money to unsecured lenders out of our development funds."

Figures from the National Credit Regulator show that unsecured lending granted in the three months through June dropped 14% from a year earlier, Capitec's Fischer said in response to whether South African consumers were being increasingly crippled by debt. "The unhealthy part is if new providers have a high-risk appetite," said Fischer. "The credit regulator is addressing the affordability definitions and this will improve overall conditions in the market."

African Bank declined to comment, while Mark Herskovits, head of debt capital markets for Transaction Capital, which oversees the issuance of Bayport’s bonds, didn't immediately respond to a message on his office phone or emailed questions.

Capitec's five-year rand bond due in May 2016 surged to its highest in two weeks yesterday at 8.925% and has climbed almost 100 basis points this year. The premium investors demand to hold the bank's notes over similarly dated South African government bonds peaked at 301 basis points in August and was 279 basis points yesterday.

Futuregrowth may shift funds from those development funds, which account for R14.2-billion of assets, to investments in alternative energy, housing, farming and infrastructure, Canter said. The asset manager is drafting a policy on unsecured lending, he said.

"It's legitimate, it's legal, but in our developmental portfolios we just don't feel like it's a story we're comfortable with," he said. "In our mainstream portfolios we'll still fund them and we'll charge more for risk. We're saying clearly the consumer is going to crack or there's going to be a political backlash or something's going to go wrong." – Bloomberg

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