Renee Bonorchis
THE asset-backed securities market is ripe for recovery after the demise of African Bank showed investors that buying lenders’ debt carries risks, according to Futuregrowth Asset Management.
Securitisation of assets such as homes and cars might climb 13 percent this year to R8.5 billion after plunging more than 30 percent in 2014, Elena Ilkova at Rand Merchant Bank said. A rebound could be hastened as yields on South African bank bonds advanced to records relative to government debt, data showed.
The August collapse of unsecured lender African Bank signalled to money managers that they were exposed to losses in the case of bank failures, even as depositors were protected. This might push the market to diversify investments into instruments such as asset-backed securities, said Andrew Canter at Futuregrowth.
“Institutions can no longer see banks as risk-free assets,” Canter, chief investment officer of Futuregrowth, South Africa’s biggest private bond investor, said on March 9.
“Securitisations can be part of the solution and it could be a new boom time” as some investors sought alternatives to bank debt, he said.
The spread on FirstRand’s December 2024 rand note rose after African Bank’s failure and has continued to climb in the past eight months, reaching an all-time high of 222 basis points above similarly dated government debt on March 5. On August 5, the spread was 148 basis points.
“Our forecast for securitisations for the calendar year is R8.5bn with a possibility for a sizeable upside surprise depending on what banks choose to do,” Ilkova, a credit analyst at RMB, FirstRand’s investment banking unit, said on Thursday. Securitisations dropped to R7.5bn last year from R10.9bn in 2013, she said.
Securitisations are created when asset-backed loans, such as those for housing or vehicles, are pooled and sold in debt capital markets, funding the lending. Issuers such as SA Home Loans and SA Taxi, who make loans in specific industries with rigid rules, may benefit the most, according to Canter. Property finance could also be popular, because it was relatively cheap compared with the cost of construction and there was latent demand, he said.
Right plan
The South African Reserve Bank imposed a 10 percent loss on African Bank’s senior debt holders last year and said all other bond holders might lose everything unless the lender could be rescued and achieve an initial public offering.
The government is also seeking to amend banking laws to increase the powers of administrators of failed lenders, a move that may give debt holders lower priority when it comes to determining who recovers their investments.
“The South African banking system is very well regulated and the Reserve Bank’s plan was the right plan,” said Canter, whose firm holds African Bank’s senior debt.
Banks in South Africa are regulated by a unit of the Reserve Bank and are also subject to legislation, including the Banks Act, company law, the stock exchange’s listings requirements and Basel III rules. Close regulation meant that none of the four biggest lenders failed or needed a government bailout during the global financial crisis.
While Standard Bank dominates mortgages with a 35 percent market share, according to Reserve Bank data, home loans from organisations other than the biggest banks have been growing, accounting for a record 5.2 percent of the market in 2014.
“Securitisation is an effective tool for funding growing consumer lending books such as home loans, car loans, credit cards” and more, said Megan McDonald, the head of global-debt primary markets for Standard Bank. “But for these books to grow strongly, a low interest rate environment is required with lots of liquidity available to consumers.”
While South African interest rates have been low, they are expected to increase. Consumers are confronting increased taxes, rising electricity costs and a partial reversal in lower fuel prices this year. Even so, these factors may not deter institutions from buying asset-backed securities.
“There has been a fundamental shift in the knowledge that institutions will take more pain” in the event of a bank failure, said Tracy Brodziak, a banks analyst at Old Mutual Investment Group in Cape Town. – Bloomberg