African Bank: what investors can learn

PF IOL 16Aug pg1iol~1 Colin Daniel

Unit trust funds held some R7 billion of African Bank Investments debt, which has been written down by R700 million, and R1.7 billion in African Bank shares, which has been written down to nothing, following the appointment of a curator for the bank and the suspension of trade in its shares and debt instruments. These estimates were made this week by the Financial Services Board (FSB) and the Association for Savings & Investment SA (Asisa).

On Monday, Asisa reassured investors, saying unit trust exposures were minimal and that the losses had already been priced into funds, making selling pointless.

Nevertheless, many investors in money market and income funds, which are regarded as the safer investments, were shocked to find themselves among those hit by the fallout from the collapse of African Bank when their fund values were written down this week.

Asisa estimates that R350 million was written off money market funds, but said only 15 of the 43 funds had exposure to African Bank.

The worst-hit money market fund was the biggest in the market, the R51-billion Absa Money Market Fund, with 3.65-percent exposure. It lost 0.3 percent of the fund, as well as a day’s interest earnings – a loss quantified at about R155 million.

Leon Campher, the chief executive officer of Asisa, says the total exposure of the 15 money market portfolios to African Bank debt instruments was only 1.9 percent of the assets under management within these portfolios.

Jurgen Boyd, the deputy registrar for collective investments at the FSB, says the exposure to African Bank debt in the 15 affected money market funds ranged from 3.65 percent to 0.12 percent.

The worst-hit income funds in the multi-asset income sub-category were Investec’s Opportunity Fund and Element’s Specialist Income Fund, both of which lost more than five percent over the week since African Bank’s problems began with a trading update on August 6. This caused the troubled microlender’s share price and its bonds and other debt instruments to plunge.

On Sunday, the Reserve Bank appointed a curator for the bank and announced a rescue package involving a 10-percent cut in value for those holding African Bank’s corporate bonds and other shorter-term fixed-interest investments, known as senior debt.

When the markets opened on Monday, trade in African Bank shares and bonds was suspended, and the FSB instructed money market funds to offset the 10-percent cut in debt values against interest earned in the fund on Saturday, Sunday and Monday, and if this was not sufficient, to cancel units to give effect to the losses.

Money market funds have a net asset value per unit of R1, unlike other unit trusts where the value of the units fluctuates daily in line with the prices of the shares, bonds and other assets held by the fund.

In addition to the write-down of senior debt, income funds and multi-asset income funds with exposure to preference shares and subordinate debt, or ordinary shares, have had to write it down to zero.

Angry Absa money market investors have noted that the manager kept its exposure to African Bank debt despite rating agency downgrades of this debt, while charging asset management fees of about R295 million a year. Absa would not confirm this figure.

Errol Shear, the chief investment officer at Absa Active Asset Management, says Absa regrets the losses investors have suffered as a result of exposure to African Bank.

African Bank had raised capital of R5.5 billion in a recent rights issue and had received a solid investment-grade rating from Moody’s at the time that the investments were made, Shear says. The downgrade to non-investment grade by the credit rating agency was announced only this week, he says.

There is a limited choice of large deposit-taking banks in South Africa, he adds.

Late yesterday, Absa announced that it had bought the African Bank debt out of its money market fund, with no impact on the fund value, to provide certainty to investors.

Shear says that, taking the African Bank exposure into account, the year-to-date return of the money market fund is 2.8 percent.

Investors in money market funds typically believe their capital is secure, but the higher return they earn in these funds compared with bank deposits involves some risk of the order that has materialised to the extent that funds were exposed to African Bank’s debt.

In return for this relatively low risk, they offer attractive yields compared with bank deposits, diversity across banks and reasonably quick access to your money.

Income funds take more risk to earn higher yields from fixed-interest instruments, while multi-asset income funds increase yields – at greater risk of losses – with exposure to equities (up to 10 percent) and listed property (up to 25 percent).

Henk Viljoen, Stanlib’s head of fixed income, says African Bank’s senior and subordinate debt were both investment grade, but subordinated debt ranks one notch lower than senior debt in terms of credit ratings and provides a higher yield than senior debt.

There are no longer credit rating requirements for funds that meet the Pension Funds Act’s investment guidelines.

Investec says several of its fixed- income funds held senior and subordinate African Bank debt, with an exposure of between one percent and, in the case of the Opportunity Income Fund, 5.8 percent. The Opportunity Income Fund has showed a return 1.1 percent for the 12 months to Thursday this week, but there is a possibility that some value will be realised in future. Investec did not justify its exposure.

Terence Craig, the chief investment officer at Element Investment Managers, says the Specialist Income Fund was exposed to African Bank’s senior debt, subordinated debt and preference shares, which theoretically should offer greater protection in a winding-up of the company.

There has been no guidance from any regulatory or industry body on what is an appropriate write-down for securities in the fund, apart from the 10 percent announced for the senior debt, Craig says.

Element has written down the senior debt, as well as the subordinated, debt by 10 percent, and has left the preference shares at the suspended price of 780 cents – 92.2 percent down on their issue price of 10 000 cents.

Other managers have apparently written down the subordinated debt and preference shares to zero.

Shear says Absa’s Income Enhancer Fund had an 11-percent exposure to African Bank and was reduced by 1.3 percent this week, with no adjustment to the income.

Andrew Canter, the chief investment officer of Futuregrowth, which had an exposure of just 1.5 percent to African Bank corporate bonds in its money market fund, says Futuregrowth had started to reduce its exposure to African Bank from 2010, but positions take time to unwind. As of January, Futuregrowth stopped investing any new money in African Bank.

Canter says there should not be any further ill effects of the write-off of the debt, because the market has priced this in and investors have already felt the effects.

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