African Bank bail-in better than Portugal'sComment on this story
London - Another week, another bank bail-in.
On August 3, Portugal pumped 4.4 billion euros (R47 billion) into Banco Espirito Santo, haircut creditor debt, and split BES into good and bad banks.
Seven days later, South Africa put 10 billion rand into African Bank Investments Limited (ABIL) and divided it in much the same way.
On balance, Pretoria has done a better job than Lisbon.
Besides both receiving state assistance, ABIL and BES have several similarities.
Reckless African lending is one - the Portuguese bank through its Angolan subsidiary, the South African institution as an entity dedicated to using flighty wholesale money to fund unsecured loans to hard-up domestic customers.
Another common theme is haemorrhaging cash to other parts of their groups: BES to parent entities that couldn't roll over commercial paper, and ABIL to its wholly owned furniture offshoot, Ellerine, which it was funding to the tune of 70 million rand a month.
The main difference is in the treatment of senior debtholders.
ABIL's 40 billion rand of senior debt will receive a 10 percent haircut, while junior bonds will be converted into equity.
A consortium of public sector funds and private sector banks will recapitalise the good bank.
BES's 8 billion euros of senior debt escaped intact, leaving the Portuguese state with a higher potential bill.
ABIL's rescue isn't perfect.
Although the bad bank is buying the good bank's worst assets at a 60 percent discount, the taxpayer will be on the hook if losses are greater.
Portugal avoided this by placing shareholders and junior debt in BES's bad bank, forcing them to potentially suffer total wipe outs.
Also, Pretoria could have made a larger write down on senior debt.
Still, taxpayer funds are supposed to be used for the public good.
Had regulators simply pushed ABIL into bankruptcy, domestic wholesale markets could have been disrupted.
Besides, most South Africans don't have the assets to borrow on a secured basis, so unsecured lending has a big political constituency.
Considering the different circumstances, ABIL's rescue looks like a small step forwards.
- South Africa's central bank stepped in on August 10 to rescue unsecured lender African Bank Investments, after the bank was hit by rising non-performing loans and unable to raise capital.
- Under the so-called curatorship, the South African Reserve Bank will buy African Bank's non-performing loans for 7 billion rand, a 59 percent discount to their book value after impairments.
The bank's other assets and operations will be transferred to a new entity, which will be recapitalised through a rights issue underwritten by six banks and the Public Investment Corporation.
African Bank's senior creditors will also take a 10 percent haircut, and be transferred to the new bank.
- African Bank, widely known as ABIL, said last week it expected to make a 6.5 billion rand loss in the year to the end of September and needed to raise 8.5 billion rand of additional capital.
The bank raised 5.5 billion rand in December 2013. - Reuters