Investors whose asset managers invested in the bonds of imploded African Bank Investments Limited (Abil), stand to get back more money than originally expected.
This follows two announcements this week by the bank’s curator, Tom Winterboer, following an agreement among asset managers and institutions that had lent money to Abil prior to its collapse.
The agreement will also stave off the immediate threat of bankruptcy for Abil. Both the South African Reserve Bank (SARB) and National Treasury indicated after the bank was put under curatorship in August last year that, without an agreement, bankruptcy was a possibility.
But investors, including individuals and retirement funds who invested in Abil bonds, will still suffer losses.
In addition, it is still not clear whether the announcement will enable unit trust fund managers to unwind their side pocket or retention funds into which Abil bonds were moved following the suspension of trading in the bonds. Investors have been unable to access funds in these side pocket funds which the Financial Services Board (FSB) agreed collective investment scheme managers could set up to ensure that new investors were not affected by the toxic debt.
The Association for Savings & investment SA (Asisa) and the FSB are to meet on Monday to explore the extent of the implications of the agreement between Abil bond holders and the curator.
There are two categories of Abil debt. There are 25 listed senior bonds with a face value of R40 billion, and these lenders are first in line to be repaid. Then there are junior (subordinated) bonds, with a face value of R4 billion, which most asset managers wrote down to zero when the bank was placed under curatorship.
The curatorship was part of a rescue package organised by the SARB. The package included the SARB taking over R17 billion in non-performing loans made by the bank to customers, for which it paid R10 billion, but the senior debt holders had to agree to take a 10-percent (R4 billion) knock on the value of their investments.
In the agreement announced this week, this 10-percent “haircut” still applies. The SARB is also trying to recover at least part of the toxic R17 billion from defaulting Abil account holders.
Nazmeera Moola, an economist and strategist at Investec Asset Management, says the announcement means that, for the junior debt, major lenders and the curator have agreed in principle to a settlement of 37.5 cents in the rand.
But, she says, the new debt instruments that are issued to cover these loans will probably trade at a discount on the bond market.
The lenders will still have a claim against what is known as the Abil “bad bank”: effectively the toxic part of Abil that was left behind after the better performing parts were ring-fenced in a “good bank” to enable its continued existence.
However, the SARB and the senior bond holders will be first in line if the “bad bank” is left with any assets. Moola says it is unlikely that the junior debt holders will receive anything more.
Moola says Investec, as a significant holder of Abil bonds, has been co-ordinating a committee of junior creditors that engaged with the curator, National Treasury, the SARB, Parliament’s finance committee, and the consortium of banks that undertook to underwrite the good bank’s equity issue.
She says the agreement provides “a better outcome for our clients than was initially proposed. On this basis, we plan to accept the offer and have therefore taken steps to reflect the additional value in our portfolios from May 28”.
This means that investors, such as unit trust investors and retirement funds that were exposed to Abil bonds, will see an improvement in their values.
In a second statement, the curator responded to a request from Asisa for clarity. He says the R4 billion junior debt will be replaced with a single bond (known as a stub bond) with a value of R1.65 billion, to be issued by the good bank. The maturity period will be 10 years and the bonds will be tradable on the JSE.
Peter Blohm, Asisa’s senior policy adviser, says the agreement has numerous implications for collective investment scheme investors whose portfolios hold Abil bonds.
Blohm says that it is unlikely that the side pocket funds will immediately be dropped. This and other implications will be discussed at the meeting between Asisa and the FSB next week.
Another problem is that the term on some of the Abil debt held in money market portfolios has been extended in the agreement to a period in excess of the 13 years permitted for financial instruments held in these portfolios.