JOHNNESBURG - African Bank, which was bailed out by the SA Reserve Bank (Sarb) after a near-fatal collapse three years ago, has offered to repurchase up to R3.2 billion of domestic bonds in an effort to reduce the interest repayments on its debt.
The bank, which is also known as the Good Bank, said it had issued an invitation to note-holders to sell any or all their holdings in certain senior unsecured notes issued under its R25bn Domestic Medium Term Note programme. The repurchase comes as Moody’s said that despite South Africa's backdrop of subdued economic growth, high unemployment and overall weak consumer credit, the performance of secured loans was likely to hold up well over the next 12 months.
Nesan Nair, a stockbroker and portfolio manager at Sasfin Securities, said the African Bank offer was linked to debt inherited from its previous incarnation. He said African Bank had been created when Sarb split the “good” customer loans of the old African Bank from the bad ones and housed it in a separate entity. It had been recapitalised by Sarb and the Public Investment Corporation which, with all the country's banks, injected R10bn while the bond debt from the old African Bank was carried over to the new entity at 90 percent of its face value.
Nair said the new debt restructure had given rise to new bonds that were the subject of Friday's announcement. “As a consequence, the cost of this debt, in terms of interest, is related to the cost of the debt on the old debt instruments, which was very high. "The Good Bank now sits with a large amount of cash having collected on the loans it issued to its customers over the last three years,” Nair said.
The cash earned less interest than the interest currently being paid on these bonds. “The result is a net interest loss which is referred to as 'negative carry'. The board has therefore decided to use the cash resources to buy back these bonds in the market in which they trade. This means they will not have to service the interest on these bonds going forward, resulting in a net saving.” In May African Banksaid its operating profit had tanked to R83million in the six months to March, down from R314m a year earlier. It attributed the decline to lower gains on bond buybacks during the period of R11m from R251m a year earlier, saying the majority of the bond buybacks had been completed in the prior period.
Profit for the period was R53m from a R1.69bn loss a year earlier, while net customer advances balances were R19.7bn from R20.1bn last year. The bank was bolstered after S&P Global Ratings revised its outlook from negative to stable in April and affirmed the B+/B global scale rating.
The agency also said the bank’s capitalisation had improved, combined with better earnings than expected. “The stable outlook balances the bank’s very strong capital levels and limited medium-term refinancing risks against the weak economic environment that could negatively impact its earnings and business stability, and the longer term risk that the bank’s funding is susceptible to investor confidence,” S&P said. The main driver in the significant reduction in the balance sheet has been the systematic repurchase of portions of the bank’s Euro Medium Term Note programme (EMTN) bonds in issue, last July and September.
The total rand equivalent of all EMTN bond repurchases, together with the early settlement of certain rand bilateral funding arrangements, as at September 30 last year, was R11.7bn, it was reported.
- BUSINESS REPORT