11 April 2016
On 4 April 2016 the “Good Bank” (the “new” African Bank) was launched as expected and the old debt was switched for a combination of new JSE-listed debt and cash. The new debt listing was conducted in line with the information provided in our update of 11 March 2016, which is contained below. Although the new bonds have been issued, there was no trading in the first week of the listing. We expect it will take some time for the market in African Bank bonds to re-establish itself given that trading in the local bonds was halted for more than eighteen months.
The bonds have been given an initial single-B rating by the credit rating agencies. While this low rating makes it difficult for the company to raise fresh debt in the market in the near future, this is not an issue since the Good Bank is cash flush (hence the return of some cash to bond investors). Looking forward, the strength of the balance sheet should also provide comfort to all holders of Good Bank debt. The main challenge for African Bank is its ability to re-invigorate its business model going forward. This will be the main focus for its well respected management team.
11 March 2016
On 1 March 2016 the Curator of African Bank confirmed that the scheduled launch of “Good Bank” (the “new” African Bank) on 4 April 2016 remains on track. At this point the existing bonds will be switched for new JSE-listed bonds issued by “Good Bank” and cash. The new bonds will be tradeable, but we expect very limited liquidity with an initial overhang of sellers. As we have indicated previously, we have valued both the senior and Tier II (subordinated) bonds conservatively. There has been no new information which has caused us to change our valuations, but it is difficult to anticipate where the bonds will actually trade on the day.
Two detailed memoranda issued late last year detailed what will happen once “Good Bank” is launched in respect of the existing bonds and have provided reassurance on the future viability of Good Bank.
- Senior bondholders and depositors to receive a new senior bond to the value of 80c in the Rand of the original, issued by the new Good Bank, as well as 10c in the Rand in cash . All accrued interest will also be paid out as cash. A new instrument for the remaining 10c will be issued out of the old African Bank which will represent a residual claim, which may have some value in time.
- Tier 2 (subordinated bondholders) will receive compensation to the value of 37.5c in the Rand. 90% of this compensation will be in the form of a Tier II instrument in the new Good Bank. This new instrument has been accruing interest from 1 December 2015 at JIBAR plus 7.25%. The remaining 10% of the compensation will be in the form of cash. A residual claim for the other 62.5c in the Rand will remain in the old African Bank, but this will be subordinated to most other claims, including the senior debt claim, and is thus very unlikely to have any value.
- The Curator’s projections expect Good Bank to be profitable even if the caps on both interest rates and credit life charges proposed by the Minister of Trade & Industry during 2015 are implemented.
- Credit indicators in the bank are improving. Helped greatly by the rapid shrinkage in disbursements, early-stage delinquencies are at multi-year lows.
Funding is stable
- Shareholding of Good Bank confirmed as the SA Reserve Bank (50%), Government Employees Pension Fund (25%) and a consortium of six large South African banks (25%, proportional to size of their SA businesses)
- The opening balance sheet of Good Bank should be conservatively positioned, with surplus liquidity and a well-provisioned book. Good Bank will not need to access debt markets until October 2018.
- Capital adequacy will also be strong.
Management is capable
- The executive team is well respected. The Chairman-designate, Louis von Zeuner, comes with three decades of banking experience from Absa. The CEO –designate, Brian Riley, ran FirstRand’s asset financing arm, Wesbank for a long period. The CFO-designate, Gustav Raubenheimer, is currently at African Bank, but has prior experience at Absa and Nedbank.
16 September 2015
The long-awaited African Bank information memorandum has been released by the Curator of African Bank. This confirmed that the formation of Good Bank remains on track and provided reassurance on its future viability. The information provided also confirms that our revaluation of African Bank debt held within our unit trusts (following the Curator’s announcement of 28 May 2015) reasonably reflects the underlying value of these instruments.
However, the proposed October launch will not be achieved and is instead scheduled for 1 February 2016.
The steps now outstanding include:
- the granting of a Credit Provider Licence by the National Credit Regulator – this is expected shortly,
- the vote by creditors, scheduled for 18-20 November 2015 and
- consent from the Minister of Finance, expected on 8 December 2015.
Despite the delay in timing, senior creditors continue to accrue interest at the existing interest rates and Tier II creditors will begin accruing interest from 1 December 2015 at JIBAR plus 7.25%.
28 May 2015
Today, the Curator of African Bank Limited (“ABL”) announced that they have reached an in principle agreement with the creditor committees of ABL. While the treatment of senior debt is largely unchanged from the initial restructure plan, the agreement will treat Tier II debt holders significantly differently.
When Reserve Bank Governor Marcus announced the curatorship on 10 August 2014, she detailed how the restructure of ABL was to be implemented, and how investors in ABL could expect to be treated.
Key to the restructure proposed by Governor Marcus was:
- Holders of senior debt were to experience a 10% haircut (meaning they would receive 90 cents in the rand, plus interest)
- A new bank (“Good Bank”) would be incorporated to hold the viable assets and business of ABL, and the non-viable assets and business would remain in the existing ABL entity (“Bad Bank”)
- Holders of Tier II debt would receive no exposure in Good Bank and would remain creditors of Bad Bank.
Pursuant to the above, we took a conservative approach and revalued the Tier II instruments in our portfolios to zero.
Since then we have worked hard to maximise the recovery for our clients. We coordinated a committee of Tier II creditors in a series of detailed engagements with the curator of ABL, National Treasury, the South African Reserve Bank (SARB), the Parliamentary Standing Committee on Finance and the consortium of banks that have undertaken to underwrite the equity issue of Good Bank.
Our engagement has culminated in the proposal announced today. The proposal was concluded due to considerable efforts of the Tier II committee, led by Investec Asset Management and Liberty Holdings. It can be summarised as follows:
- Tier II creditors of ABL have been offered R1.65bn in Basel III compliant new Tier II debt in the new Good Bank (“the new instruments”). This equates nominally to a settlement of 37.5 cents in the rand, but we anticipate the instruments will trade at a discount.
- Tier II creditors will retain a residual claim against the existing ABL entity, which will be subordinated to the claims of the SARB and senior creditors. It is extremely unlikely that this residual claim will lead to further recovery, as the existing ABL entity will hold the non-performing assets of the ABL business.
- The new Tier II instruments will be afforded the opportunity to participate in the equity of Good Bank as an alternative.
Despite the provision of limited information by the Curator, the SA Reserve Bank and the National Treasury have repeatedly warned in public forums that there is a strong risk of liquidation of ABL if they are unable to reach agreement with creditors and implement the Good Bank in a timely manner.
If ABL is liquidated, the SARB and the curator have predicted that the Tier II creditors will certainly receive zero recovery. These were key considerations in our in principle agreement with the Good Bank Restructure Proposal tabled by the curator.
We note that the offer to senior creditors of ABL remains materially the same as what Governor Marcus announced on 10 August 2014. This consists of:
- 90% of existing senior claims will be exchanged for senior debt in Good Bank on the existing economic claims.
- The maturity shall be extended by the period from the date of Curatorship to the formation of Good Bank plus 24 months.
- The remaining 10% of the senior claim will receive a new stub debt instrument in African Bank, which will rank behind the SARB’s loan funding to be provided to African Bank.
Following this announcement, we plan to reflect the relevant impact on ABL debt values in our portfolios as from 28 May 2015.
Impact of revaluation on fund performance
|Portfolio Name||Effect of Tier II
|1-year performance to 27/05/2015
(before the inclusion of the new Tier II instrument)
(net of fees)
|1-year performance to 28/05/2015
(including the new Tier II instrument)
(net of fees)
|Investec Opportunity Income A||1.59%||1.38%||3.20%|
|Investec Absolute Income A||1.15%||1.01%||2.25%|
|Investec Diversified Income A||0.30%||6.09%||6.61%|
|Investec STeFI Plus A||0.29%||5.08%||5.38%|
|Investec High Income A||0.50%||4.67%||5.19%|
|Investec Absolute Balanced A||0.09%||4.01%||4.15%|
|Investec Managed A||0.07%||13.02%||13.06%|
|Investec Gilt A||0.18%||6.84%||7.52%|
|Investec Opportunity A||0.04%||7.36%||8.45%|
Source: Morningstar, returns are net of A-class fees Returns in column four include the effect of market movement between 27.05.15 and 28.05.15. Returns are calculated on a bid-to-bid basis, net of A class fees, with gross income reinvested.
This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute an offer for sale. All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. Collective investment schemes in securities (CISs) are generally medium to long term investments and the manager gives no guarantee with respect to the capital or the return of the Funds. A schedule of charges, fees and advisor fees is available on request from the Manager, Investec Fund Managers SA (RF) (Pty) Ltd. Performance shown is that of the funds and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax and past performance is not necessarily a guide to the future.
Investec Asset Management (Pty) Limited is an authorised financial services providerThis is the copyright of Investec and its contents may not be re-used without Investec’s prior permission.
3 March 2015
Update following SENS announcement of 3 March 2015
Following the curatorship of African Bank in mid-August 2014, we have remained closely engaged with the process to protect the interests of our investors. As we expected, African Bank has continued to operate as a going concern, an outcome that offers the best prospects for all affected parties. It appears that the collection of the "Bad Book" is progressing well. The Curator remains committed to the proposed restructure of African Bank into a new "Good Bank" at which point senior debt should be free to trade. The Curator has begun to put a new management team in place for the Good Bank and Louis van Zeuner, the retired deputy-CEO of ABSA Bank, has been appointed as Chairman designate. However, the listing of this "Good Bank" appears to no longer be a priority which means the underwriters, being the banking consortium and the PIC, would remain as shareholders. The restructure has been further delayed due to the various regulatory approvals and processes.
- In the latest update issued on 3 March 2015, the Curator noted that African Bank collections are running as expected; inflows from customers servicing debt have varied between R2.0bn and R2.5bn between August 2014 and January 2015. Disbursements have varied between R550m and R750m over the same period, following the tightening in credit criteria in August 2014. The Bank is targeting disbursements of ZAR1bn/month;
- Due to lower disbursement levels, the management team has embarked on a consultation process for the re-deployment or retrenchment of some 50 non-union management staff;
- The Curator expects to provide an Information Memorandum to the affected parties detailing the intended restructuring approach to African Bank, towards the beginning of May 2015;
- Once the Information Memorandum has been published, the Curator will invite comment from all affected parties. To allow affected parties to evaluate the merits of the offer, the Curator will make available prospective financial information for Good Bank and African Bank at that time;
- Currently, it is proposed that senior debt will be transferred to Good Bank at the current 10% haircut with a term extension of 24 months, with the new debt instruments listed on the JSE. Senior lenders who consent to this will receive any interest accrued but unpaid during the period of Curatorship;
- The business rescue process underway at Ellerines is not expected to impact on the recovery of senior and subordinated debt holders in African Bank.
We are actively engaging with all relevant parties to protect the interests of our clients and to maximise recovery on the debt instruments. Since the claims of the Tier II debt holders are not sub-ordinated to senior debt holders until liquidation, their claims remain on an equal footing with senior debt holders at this stage. Therefore the claims of the Tier II debt-holders need to be resolved before the final plan can be implemented.
As the African Bank holdings in our funds have not been side-pocketed, any clients who leave funds which held African Bank debt will not benefit from any potential recovery. We may, at our discretion, elect to side-pocket African Bank holdings in funds in order to protect investors.
This webpage will be refreshed with any new information as soon as this is available and we encourage you to check back regularly, while we continue to work to realise value for our investors.
5 February 2015
Why is Investec Asset Management opposing the Banks Amendment Bill?
Investec Asset Management manages portfolios in excess of R1 trillion for our clients, which include Southern African pension funds and individual savers. At all times we are bound by our fiduciary obligations to pursue the interests of our clients, regardless of our corporate interests. At Investec Asset Management we take these obligations seriously, as our only business is to manage other people’s money.
A number of the portfolios we manage hold debt issued by all the major South African banks, including African Bank. We have a fiduciary duty (both contractual and statutory) to act to protect the rights of our clients that hold this debt. In our view, our clients will be severely prejudiced by the planned retrospective amendments to the Banks Act. These amendments will deprive holders of African Bank debt, and potentially debt issued by the banking sector in general, of existing property rights.
Our aim in opposing certain parts of the Banks Amendment Bill is to ensure that the law is upheld and the property rights of our clients – who are mainly pension fund members and individual savers – are protected.
We firmly believe this can be achieved without endangering the stability of the South African financial markets. Similarly, we do not believe that retrospective changes to property rights are needed to relist African Bank. We believe there are other viable, more efficient, and value-enhancing alternatives that can be considered to restructure African Bank.
We support the National Treasury’s aim of ensuring a sound financial system with minimal potential costs to the average tax-payer. Nonetheless, this cannot be done in a manner that sacrifices the property rights of an asset that was sold under a different legal and economic framework three to six years ago. The Banks Amendment Bill is attempting to nullify certain rights of African Bank debt-holders. We believe that if enacted, these significant retrospective changes will badly damage South Africa’s standing amongst local and foreign investors.