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Futuregrowth shelves lending to three state companies

“In the face of uncertainty investors have to be defensive and start asking more questions.” – Andrew Canter.

SIKI MGABADELI:  South Africa’s biggest private fixed-income money manager, Futuregrowth Asset Management, is going to stop lending money to six of South Africa’s largest state companies, because it’s concerned about how they are being run. Futuregrowth has about R170bn in assets.

Chatting to us now is their chief investment officer, Andrew Canter. Andrew, thanks for your time this evening. Why this decision now?

ANDREW CANTER:  We are always watching the press and the allegations, counter-allegations and the appearance of government at war with itself. I would appear, based on the presidency’s decision last week to set up a council, whatever that means, to oversee the SOEs [state-owned enterprises], whatever that means. It puts into question how the SOEs themselves are managing their own governance and their own independence, and we just felt that in our investment strategy when we contemplate making loans to these entities, that we cannot rationally take a five- to ten-year view on their financial status. That means we can’t make loans to them.

This is not a shot across the bow, it’s not a political statement, it is merely saying that we have uncertainty and in the face of uncertainty investors have to be defensive and start asking more questions, which we intend to be doing.

SIKI MGABADELI:  Among of the questions that you are asking now, you’ve said in order to start lending again you want them to give you information about the independence of their board, information about the investment and credit committees and procurement processes, and so on. Were you asking those questions before and were you satisfied?

ANDREW CANTER:  Sure. Part of normal investment analysis or credit analysis in our world where we make loans is financial analysis. We look at forecasts, the business model or competitor damage management and governance. Governance is always there.

But usually when you think about a big state-owned entity you read the annual report and you look at who’s on it. We want to get into more detail now. We want to ensure that there are not politically connected people on those investment committees, credit committees or procurement committees who may have different agendas. We want to ensure we can justify having made loans to entities, that the decisions they are making are actually in the best interest…of the company and not for some other personal agenda.

And these are questions that are deeper questions – that you actually have to look at each individual and have to look at the charters of each of those committees. And that’s what we intend to do. We hope it’s a productive process and a positive process.

These are big entities with long track records and which we have dealt with for a long time. We don’t think we’ll find nefariousness; we think we’ll find positive answers. But for the moment we just can’t make decisions.

SIKI MGABADELI:  Were there any loans outstanding at the time of your decision?

ANDREW CANTER:  Oh, sure. We are managing R170bn of domestic South African assets as fixed-interest managers. We have billions and billions of exposure to these entities, and the thing that raised its head this week was the process of approving an additional up to R1.8bn to three different entities. And as we came to the credit committees, we said can we take a ten-year view on these businesses? And we realised we had unanswered questions and we had to suspend that decision and open up those discussions with the entities.

SIKI MGABADELI:  And I assume you’ve notified them. How did they react?

ANDREW CANTER:  It wasn’t as hostile as one might think. I think they understood. I think there’s a sense that everybody reads newspapers, we are all seeing what’s going on in the country. We all have questions and fears and uncertainties – and that’s not a political thing, that’s just an observation of the wars around us. And I think they did understand.

And the more positive response is to engage quickly, to tell you what we are doing, how we are buttressing our own governance and how we aren’t politically disposed people, how we do have non-executive independent credit committee members. That’s the discussion we really want to have.

SIKI MGABADELI:  Thanks to Andrew Canter. Let’s chat to Mike Schüssler now, chief economist with Econoists.co.za.

Mike, thanks for your time this evening. What do you make of this decision?

MIKE SCHÜSSLER:  Well, I think we’re in a very different arena. If you go back, in many other countries when asset managers start making these sort of pronouncements, it’s probably very often more the run-up to a downgrade than anything else, because they have their own researchers, they have a huge amount of information available to them – not just systems like Reuters and Bloomberg. In the rating agencies themselves they have their own researchers, they do telephone calls, they are able to put together the pieces that we the public just can’t do. So this is a very, very big move and it is obviously a shock to the markets.

But I suspect that other market players will now start laying down their ideas as to who they are going to lend extra money to in the government as well. So I think the money is going to start drying up for new funds for many a government firm. If we think of Eskom, they are going to need a huge amount of money, for example, if they want to do nuclear power stations or if they want to do a further coal power station. And they need further money in these power stations that they have. This is a very, very big, real economic move.

SIKI MGABADELI:  And what does it mean for government finances itself, because if they aren’t able to get money from independent sources, then I assume they are go with the begging bowl to Treasury for further guarantees or cash.

MIKE SCHÜSSLER:  Well, that one thing they can do and they can obviously go back to the PIC and say please invest. But that’s going to put the risk back on the public servants alone, and that’s probably not enough, although the PIC is the biggest fund manager in South Africa.

At this juncture I think it’s not so much the government thing that’s coming up here with the treasury bond. I think it’s more the state-owned enterprises and maybe the government guarantees aren’t enough any more to convince fund managers to invest there. The mismanagement of funds and projects is certainly becoming very, very worrisome. Take, for example, the power stations that have more than doubled in price. Take for example, the electricity price increases that normal people in the street can’t afford any more. So these are very big decisions by people who look after our pensions.

SIKI MGABADELI:  And how do you expect government to react, then, to this?

MIKE SCHÜSSLER:  I’m not sure how this is going to play out on the government side, because the government is at war with itself. But government is going to have to make peace with the fact that if they want money they are going to have to deliver value and efficiency and they are going to have to be much more transparent than has been the case up to now, seemingly. And certainly those sort of things.

And then, as we know, the Treasury seems to be the sort of “good guys”, whereas some of the stuff going on in the state-owned enterprises seem to be of a nature that is not comprehensible. And I’m wondering what the sort of information is that these people have, because remember it’s not just future Futuregrowth now, it’s the banks of South Africa, the auditing firms, the sponsoring firms.

So there’s something really on the go here, and these people obviously want to do business in other countries where they have to be seen to be above board. It doesn’t mean that people don’t make mistakes, like investment mistakes or the like, it just means that they’ve got to be seen as honest and reasonable – and Siki, that’s maybe what they are also afraid of.

SIKI MGABADELI:  We’ll have to leave it there. Thanks to Mike Schüssler.

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As a concerned citizen and retired teacher, I keep track of the economic news, analysis, press statements , and so on. All informed citizens are concerned about the government’s “funny” actions with regard to finances. This latest developments are really good news to us as retired citizens. I trust that there will be a follow-up of more regulatory interventions to keep the looters at bay and finally to catch them with their hands in the cookie jar.

End of comments.

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