The development funds of Old Mutual’s South African fixed-income investment unit have halted purchases of bonds from unsecured lenders in the country because the high-interest credit they offer is hurting consumers.
Futuregrowth Asset Management would “wind down” its holdings of bonds in Capitec Bank, African Bank Investment and other unsecured lenders over three to four years as the securities matured, said chief investment officer Andrew Canter, who helps oversee R128 billion.
This was not a “panic exit”, he said, adding that the Old Mutual unit might hold R1bn of the bonds.
“From having the view that microlending was always a social good, now we’re shifting and saying maybe not, maybe there’s damage being done,” Canter said on Wednesday.
“Nobody says it’s their intention to cripple people, but de facto, that’s what’s happening.”
Carl Fischer, the executive director of marketing and corporate affairs at Capitec, said in response to questions that new entrants to South Africa’s unsecured lending market had reduced the price of credit.
South African consumer borrowing not backed by assets surged fourfold to more than R120bn in the three years to 2012, according to Macquarie Group, as lenders such as Bayport Financial Services competed for low-income clients.
With annual interest rates of as much as 60 percent, those low-income customers are struggling to repay loans as increasing fuel and power prices pushed consumer inflation up to a four-year high of 6.4 percent in August.
“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,” Canter said.
“We’re not saying the likes of Capitec or Bayport aren’t creditworthy, 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 to June dropped 14 percent 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,” Fischer said.
“The credit regulator is addressing the affordability definitions and this will improve overall conditions in the market,” he added.
African Bank declined to comment, while Mark Herskovits, the head of debt capital markets for Transaction Capital, which oversees the issuance of Bayport’s bonds, did not immediately respond to a message on his office phone or e-mailed questions.
The yield on Capitec’s five-year rand bond due in May 2016 surged to a two-week high on Wednesday at 8.925 percent 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 at 279 basis points on Wednesday.
Futuregrowth might shift funds from those development funds, which account for R14.2bn of assets, to investments in alternative energy, housing, farming and infrastructure, Canter said.
The asset manager was drafting a policy on unsecured lending, he said, adding that clients had questioned why Futuregrowth held bonds issued by such lenders.
“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