African Bank splits to isolate loans in Reserve Bank rescue

Reserve Bank governor Gill Marcus said African Bank will remain open for business and collections on debt will continue. (Gallo)

Reserve Bank governor Gill Marcus said African Bank will remain open for business and collections on debt will continue. (Gallo)

African Bank Investments Ltd. got emergency support from South Africa’s central bank in a plan calling for the company to raise R10-billion in capital and break off a so-called bad bank for soured loans.

Firms including Barclays Africa Group, FirstRand and fund administrator Public Investment Corporation agreed to underwrite the capital raising for the remaining good bank, South African Reserve Bank (SARB)Governor Gill Marcus told reporters in Pretoria on Sunday. The book value of the good bank is R26-billion after impairments.
The bad bank will be placed in a SARB-backed vehicle, with the Reserve Bank paying R7-billion for the unit’s R17-billion-rand book.

“It’s a good idea because there’s a portion of the business that’‘s still working and some people are still servicing their debts,” Owen Nkomo, founder of Inkunzi Investments, a brokerage, said by phone from Johannesburg on Sunday. “I don’t think SARB will sell the bad book but will try to make as much money from it in collections as it can.”

The central bank’s rescue package, which includes creditor protection, culminates a week in which African Bank lost most of its market value and comes just days after the Portuguese government stepped in to save Banco Espirito Santo SA. African Bank surprised investors on August 6 by saying chief executive and founder Leon Kirkinis resigned, it will have a record loss this year and needs a fresh capital injection.

‘The plan can work’
African Bank was put under curatorship, or administration, to give it time to come up with a rescue plan, the Reserve Bank said. Tom Winterboer, part of the financial services leadership team at PwC, will be responsible for African Bank with immediate effect and is expected to suspend interest payments, the Central Bank said, without giving further information.

“I’m surprised by what SARB has done, but it’s a good surprise,” Simon Brown, the chief executive of JustOneLap, an investment and trading training website, said by phone from Johannesburg on Monday. “They’ve been decisive and the plan can work.”

African Bank on Monday asked the Johannesburg Stock Exchange to suspend trading in its shares and debt securities.

The good bank will be listed on the JSE, the central bank said. Senior debt instruments will be transferred to the good bank at 90% of face value, while shareholders and subordinated debt holders will be “afforded the opportunity to participate in the good bank,” according to the central bank, which didn’t give more details.

Shareholders lose
“Shareholders will lose, bondholders to a lesser degree,” Brown said. If Abil’s good bank is listed “I won’t take a punt because I have a long memory, but the listing is a good idea because it provides an exit for some investors and an elegant solution for the big banks that would rather be investing in their own unsecured lending divisions.”

The price on African Bank’s $350-million of bonds due February 2017 slumped to 45% of face value on August 7, from 99 on August 1, according to data compiled by Bloomberg. That drove the yield to 47.49%. The stock had dropped 95% in Johannesburg last week to 31 cents for a market value of R465.3-million.

Part of African Bank’s troubles stemmed from its R9.2 billion acquisition of furniture retailer Ellerine Holdings in 2008, which prompted losses and writedowns after sales dropped. Abil doesn’t take deposits and typically disburses small loans not backed by assets to low-income earners. Many customers are struggling to keep up with repayments amid rising unemployment and inflation.

Peter Spratt and David Gard, also from PwC, will help Winterboer oversee Abil’s restructuring, Marcus said.

No payment holiday
“African Bank continues to be open for business,” she said. “Collection against the bad book will be continued, and indeed strengthened: there is no payment holiday for anyone owing on a loan from African Bank.”

Abil had R101-million in depositors’ money at the end of May, according to central bank information, with that money now guaranteed.

“In South Africa, consumer finance has gotten out of control and the household debt is very, very high,” Mark Mobius, executive chairman of Templeton Emerging Markets Group, which oversees about $40-billion, said in an interview in Seoul on Monday. “I would say that it [Abil] will survive, but I don’t know if it’s a good idea.”

While Abil’s shares won’t trade on Monday, there have been no indications that other South African banks have been affected negatively by Abil’s trading update or its current situation, according to Marcus. – Bloomberg

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