African Bank Splits to Isolate Loans in Central-Bank Rescue

Aug 11, 2014 11:01 am ET

(Updates with stock indexes in penultimate paragraph.)

Aug. 11 (Bloomberg) -- African Bank Investments Ltd. secured emergency support from South Africa’s central bank in a plan calling for the company to raise 10 billion rand ($938 million) in capital and break off a so-called bad bank for soured loans.

Firms including Barclays Africa Group Ltd., FirstRand Ltd. and fund administrator Public Investment Corp. agreed to underwrite the capital raising for the remaining good bank, South African Reserve Bank Governor Gill Marcus told reporters in Pretoria yesterday. The book value of the good bank is 26 billion rand after impairments. The bad bank will be placed in a SARB-backed vehicle, with the Reserve Bank paying 7 billion rand for the unit’s 17 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 Ltd., a brokerage, said by phone from Johannesburg yesterday. “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 Aug. 6 by forecasting a record loss this year and announcing the resignation of founder and Chief Executive Officer Leon Kirkinis.

Surprised

African Bank was put under curatorship, or administration, to give it time to carry out the rescue plan, the Reserve Bank said. Tom Winterboer, part of the financial services leadership team at PricewaterhouseCoopers LLP, 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 CEO of JustOneLap, an investment and trading training website, said by phone from Johannesburg today. “They’ve been decisive and the plan can work.”

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

The good bank’s shares will trade on the JSE, the central bank said. Senior debt instruments will be transferred to the good bank at 90 percent 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 percent of face value on Aug. 7, from 99 percent on Aug. 1, according to data compiled by Bloomberg. That drove the yield to 47.49 percent. The stock had dropped 95 percent in Johannesburg last week to 31 cents for a market value of 465.3 million rand.

Part of African Bank’s troubles stemmed from its 9.2 billion-rand acquisition of furniture retailer Ellerine Holdings Ltd. 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 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 101 million rand 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 today. “I would say that it will survive, but I don’t know if it’s a good idea.”

While Abil’s shares won’t trade today, there have been no indications that other South African banks have been hurt by its troubles, according to Marcus. The banks’ index rose 1.4 percent as of 3:32 p.m., the most in a week, and the benchmark all-share index climbed 1.6 percent, the most this year.

“We believe SARB acted decisively to ensure ongoing stability of the financial system,” Mike Brown, chief executive officer of Nedbank Group Ltd., said in an emailed response to questions today, adding that its role in helping rescue Abil won’t strain the lender.