Banque CIC Suisse Sees Buy Opportunity in African Bank Debt

Aug 14, 2014 9:09 am ET

(Updates with rating cut to junk in final paragraph.)

Aug. 14 (Bloomberg) -- As African Bank Investments Ltd.’s bondholders calculate losses after a central-bank rescue of the South African lender that includes a debt write down, Banque CIC Suisse sees a buying opportunity.

The Basel-based money manager, which holds African Bank’s Swiss franc-denominated notes maturing in July 2015 and November 2016, believes 10 percent impairment ordered by the South African Reserve Bank is “reasonable” and will help save the lender, said Luca Carrozzo, a fund manager at Banque CIC. African Bank has been split into a “good” bank and “bad” book, with the Pretoria-based central bank buying the soured loans.

“We see this 10 percent cut as a price for the quick solution for senior debt holders,” Carrozzo said in an Aug. 12 e-mailed response to questions. “We expect that the African Bank story will have a happy end, with some volatile moments. I would buy into weakness.”

Abil, as the lender is known, collapsed after saying last week it needed to raise at least 8.5 billion rand ($803 million) to survive, causing the stock to drop 95 percent over three days and bond prices to fall by more than half. While Banque CIC sold some of its holdings of the Swiss franc notes as yields surged, it held onto a portion expecting things will improve, Carrozzo said.

“We as investors needed to see a good business plan or an intervention by the government,” he said. “Now that this has happened, I think they will redeem the bonds.”

Maturing Bonds

Debt holders in Johannesburg-based Abil won’t be paid when 1 billion rand of bonds mature next month, Tom Winterboer of PricewaterhouseCoopers LLP, who was appointed caretaker of the bank, said yesterday.

“The September bonds are suspended for now -- we need to get a better handle on things first,” he said by phone from Johannesburg. “Interest is being suspended. The 10 percent haircut for senior bondholders is on the interest and the capital.”

Yields on Swiss franc debt due 2016 dropped 40 basis points this week to 18.7 percent by 5:55 p.m. in Johannesburg yesterday. The yield reached a high of 58.4 percent on Aug. 8, two days after Abil’s founder and Chief Executive Officer Leon Kirkinis resigned and the company said it will post a record loss. Rand bond yields have barely budged as secondary-market trade dried up.

Johannesburg’s Momentum Asset Management, which holds Abil debt, said the 10 percent impairment may be too much, given the bank’s ability to recover loan repayments.

‘Limited’ Appetite

“Our initial reaction to the 10 percent haircut was one of surprise,” Conrad Wood, head of fixed-income investments at Momentum, said by phone from Johannesburg yesterday. “We’d like some insight as to how they arrived at that and we look forward to engaging with the curator soon.”

Debt investors should be first in line for collections from the “bad bank” after the central bank has recovered the 7 billion rand it paid for 17 billion rand of loans, Wood said. Momentum would have “very, very limited” appetite for new Abil debt, he said on Aug. 12.

Cape Town’s Investec Asset Management and Johannesburg- based Stanlib were among money managers who said this week their fixed-income funds will be impaired as a result of the write down.

Moody’s Investors Service downgraded Abil’s debt seven levels to Caa2 from Ba1 on Aug. 12, and said the lender faced further downgrades should bond losses exceed 10 percent. Moody’s cut the bank’s foreign rating to junk in May.

--With assistance from Renee Bonorchis in Johannesburg.