Valuation of Abil debt affects how much investors stand to lose
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The way in which asset managers are pricing the junior debt of collapsed microlender and bank African Bank Investments Limited (Abil) is becoming increasingly complex, which affects the potential losses that you, as a unit trust investor, and your retirement fund may incur on investments in this debt.
There are two kinds of Abil debt:
* 25 listed senior bonds with a face value of R40 billion. The investors in these bonds are first in line to be repaid.
* Junior (subordinated or Tier II) bonds with a face value of R4.4 billion, which most asset managers wrote down to zero when the bank was placed under curatorship in August last year.
The curatorship was part of a rescue package organised by the South African Reserve Bank (SARB). The package involved the SARB paying R10 billion for R17 billion of non-performing loans made by the bank and senior debt-holders agreeing to write down 10 percent, or R4 billion, of the value of their bonds.
The situation became complicated in May, when Tom Winterboer, the curator of Abil, announced an agreement with asset managers and institutions that had lent money to Abil before it collapsed.
In terms of the agreement, the 10-percent “haircut” on the senior debt would remain, but the junior debt would be replaced with a new single bond (known as a stub bond, because it replaces the original bonds) with a value of R1.65 billion. The agreement, in effect, amounted to a settlement of 37.5 cents in the rand on the issued value of the original junior bonds.
At the time of the agreement, most asset managers, which hold the debt in collective investment scheme and retirement fund portfolios, said that, once the debt can be traded, it is likely to be traded at a discount to the issue price. The debt is expected to be issued towards the end of the year.
Since the agreement, asset managers have been applying different values to the junior debt, and some have been taking asset management fees based on their valuations of the debt.
Soon after the bank collapsed, most asset managers holding Abil debt in collective investment schemes chose to transfer the money out of the affected funds into side pocket, or retention, funds – effectively new portfolios that hold only Abil debt. The main reason was to protect new investors against potential losses.
The value placed on the Abil debt in the side pockets does not mean you can realise that value, because, until the new bonds are issued, the debt cannot be traded, and you cannot withdraw your money from the side pockets. However, with a value on the debt, asset managers can apply fees.
A snap poll by Personal Finance of the asset managers with some of the biggest holdings of Abil junior debt found that two of the three managers have valued their debt holdings at less than 37.5 cents in the rand, because they think a higher value would not be prudent. Investec Asset Management (IAM) has set the value at 26 cents and Stanlib has chosen 28 cents, while Momentum has valued in full (37.5 cents).
Nazmeera Moola, an economist and strategist at IAM, says that Investec took numerous factors into account when arriving at a valuation.
IAM, which did not transfer its Abil debt holdings to side pockets, is charging an asset management fee of between 0.15 and 0.6 percent on the debt, depending on the fund. Neither Stanlib nor Momentum is charging a fee.
ASSETS MUST HAVE ‘FAIR MARKET PRICE’
The Collective Investment Schemes Control Act requires that a “fair market price” be placed on all assets in collective investment scheme portfolios, Jurgen Boyd, the deputy executive officer for collective investment schemes at the Financial Services Board (FSB), says.
He says the FSB will not prescribe the price that funds should place on the African Bank debt, because it needs to guard against interfering in the market. However, the FSB is developing a model to assist in the valuation of the debt.
In the meantime, asset managers are expected to use the standard net asset value calculation for collective investment schemes, which is provided by the Association for Savings & Investment SA. Boyd says this “is an acceptable standard”.
The announcement by the curator of African Bank that holders of subordinated debt will receive 37.5 percent of their outstanding R4.4 billion by way of a debt paper exchange clearly creates some value, Boyd says.
He says he cannot currently fault the asset managers’ process of determining the value of the debt, which was done with the consensus of the trustees of the funds. The values “may obviously change as different announcements or developments in the curatorship unfold going forward”.