Investors in money market unit trust funds, whose exposure to African Bank debt was side-pocketed after the collapse of the bank in August, will not have access to the side pockets any time soon.
This week, Tom Winterboer, the curator of African Bank, said it is likely that the restructuring of African Bank will be completed only after the first quarter of 2015.
The South African Reserve Bank (SARB) placed African Bank under curatorship on August 10. Trading in African Bank debt instruments was suspended the following day. As a result, some managers of money market and fixed-interest funds with exposure to African Bank debt instruments moved these instruments to side-pocket funds (see “Side pockets may be a headache for deceased estates and retirement funds”, below).
A consortium of six banks, together with the Government Employees Pension Fund (represented by the Public Investment Corporation), have undertaken to underwrite the raising of R10 billion to capitalise the creation of a new “good bank” out of African Bank. The “good bank” will be a wholly owned subsidiary of a newly established holding company, which will be listed on the JSE.
Winterboer says an application for a banking licence for the “good bank” was submitted to SARB on October 28.
The core lending assets of African Bank, which have a net book value of about R26 billion, will be transferred to the “good bank”. All holders of senior unsecured African Bank debt instruments (see “Jargon-buster”, below) will be invited to exchange these instruments for new debt instruments issued by the “good bank”. These instruments will be listed on the JSE, the London Stock Exchange and in Switzerland.
Winterboer says that holders of senior unsecured debt who agree to the swop will receive the interest that has been accumulating on this debt during the period of curatorship.
Jurgen Boyd, the registrar of collective investments at the Financial Services Board, says African Bank debt will become tradable again once the “good bank” has been listed. Portfolio managers may decide to liquidate their debt or hold it to maturity.
Once the debt becomes tradable, it will not be necessary to keep it in side pockets. However, Boyd says it will be up to each manager to decide whether to keep it in a side pocket or move it out.
Boyd says he cannot speculate on the implications for investors if holders of debt decline to take up the exchange offer.
Winterboer says he will continue to engage with holders of subordinated debt, and an announcement will be made in due course on what is to happen to this debt. Once the senior and subordinated debt has been dealt with, the board of African Bank will engage with holders of preference and ordinary shares. This is expected to happen in first quarter of 2015.
Since the curatorship, the lending risk criteria of African Bank have been tightened up to take into account the current circumstances of the bank and the economic situation, and to be consistent with the envisaged business model of the “good bank”, Winterboer says.
JARGON-BUSTER
*What is senior and subordinated debt?
A business can borrow money by issuing bonds or obtaining a bank loan. Both are different forms of debt. “Senior” means that the debt has priority over other types of debt; “unsecured” means that the debt is not secured by any collateral.
If a business defaults on its obligations, it can be forced into liquidation, in which case its assets will be sold off to repay the debts. Debts are repaid in a prescribed order of priority: first senior debt and then junior or “subordinated” debt. Because it has no specific collateral, unsecured debt is backed only by a business’s credit rating and ability to repay.
Senior debt holders are more likely to get some or all of their money back compared with other debt holders.
*What are preference shares?
Preference shares allow an investor to own a stake in the issuing company with a condition that, whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid, at a fixed rate or fixed amount. If the company is wound up, these investors have the right to the return of their share capital before that of ordinary shareholders.