If you are an investor who has money in any of the 50 unit trust funds that set up side-pocket or retention funds to hold African Bank debt after the bank collapsed in August 2014, you are a step closer to cashing in these inaccessible units, but it may be optimistic to expect to have access to your money in the first week of April when trading in the debt is expected to open.
The curator of African Bank, Tom Winterboer, this week issued exchange-offer documents to the bank’s creditors, proposing that they exchange their claims in African Bank for new debt in the restructured bank and some cash.
Good business written by African Bank before and after the bank went under curatorship will be restructured into what is being referred to as the “Good Bank” and recapitalised with an investment from other banks and the Public Investment Corporation.
The remaining bad loans will be restructured into what is being referred to as the “Residual Bank”.
Unit trust funds that hold what is known as senior debt in African Bank will be able to exchange 80 percent of that debt for bonds in the Good Bank, 10 percent of it for debt in the Residual Bank and 10 percent for cash.
The holding in the Residual Bank is unlikely to realise any value quickly, and unit trusts and other creditors wrote down this 10 percent on instruction from the South African Reserve Bank in August 2014.
Winterboer also announced that investors would receive the interest they should have been paid on 90 percent of the value of their bonds since August 2014, but most of this will be recapitalised and only 10 percent paid as cash.
Funds holding subordinated debt are being offered a new 10-year, listed, subordinated debt instrument or an equivalent amount of shares in a new holding company plus some cash.
Jurgen Boyd, the deputy registrar for collective investment schemes at the Financial Services Board (FSB), says that as soon as the debt in African Bank is exchanged for new instruments and those new instruments start trading, which is expected to be in the week of April 4, funds will have to transfer the bonds from the side-pocket funds back into the money market or income funds from which they originated. This is because the side-pocket funds were permitted only for illiquid instruments.
But Arno Lawrence, chief investment officer at Atlantic Asset Management, which has a side-pocket fund for two of its income funds, says this will not be fair to investors in the main funds.
He says there are likely to be more sellers than buyers of the bonds in the Good Bank and the bonds are likely to trade at a discount to the value at which they are issued. Transferring these bonds from the side-pocket funds back into the funds from which the African Bank debt came will result in losses for those who invested after the African Bank collapse.
He says that while the curator’s announcement is good news for investors, the Association for Savings & Investment SA is likely to engage with the FSB on behalf of unit trust companies to find a fair and transparent way to transfer the units in the side-pocket funds back to the main funds. This may delay the transfer and investors being able to access their money beyond the first week of April.
Boyd said the FSB would be willing to consider such a request to prevent the forced sale of the new bonds when it is not in investors’ best interests.