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Abil legislative push concerns investors

‘We’re now at the complete mercy of the regulator’ – Cadiz money manager.

Investors in South African banks are growing increasingly concerned over proposed legislation stripping them of some rights as creditors, fallout from the August collapse of African Bank Investments Ltd.

The Banks Amendment Bill would give the administrator of a failed lender the right to sell assets and change capital structures without consulting investors, according to the document, compiled by the country’s National Treasury. If enacted, the proposal would apply any time a financial institution goes into administration.

“We’re now at the complete mercy of the regulator,” Bronwyn Blood, a money manager at Cape Town-based Cadiz Asset Management, which owns African Bank bonds amid the more than 34 billion rand ($2.9 billion) the firm manages, said by phone on Dec. 8. “Most investors won’t be happy with this. There is pressure for groups to get together and lobby and this will probably happen in the next couple of weeks.”

The demise of Abil, as the unsecured lender is known, has rippled through the nation’s markets, with corporate debt down 45 percent in the second half of 2014, from a year earlier, according to Standard Bank Group Ltd. This was “largely due to the unease of both investors and issuers, subsequent to the collapse of African Bank,” it said.

‘Abil fiasco’

The yield on Nedbank Group Ltd.’s June 2021 security has risen 12 basis points since the bill was published Nov. 25, while the rate on February 2019 notes for unsecured lending rival Capitec Bank Holdings Ltd. climbed 102 basis points. The average yield on the JPMorgan Chase & Co. CEMBI Financial Index increased 24 basis points.

“The fourth quarter of 2014 has so far recorded the lowest issuance on a quarterly basis in at least the past four years,” Steffen Kriel, a credit analyst at Standard Bank, said in a note to clients on Dec. 8. “Spreads increased significantly after the Abil fiasco.”

As the lender collapsed, the South African Reserve Bank intervened and appointed Tom Winterboer administrator. Senior debt holders may lose 10 cents for every rand invested, it said Aug. 10, while others may lose everything unless there is a successful initial public offering for Abil’s remaining viable assets.

The bill must be discussed by Parliament, which is in recess until February, before it is voted on and becomes law.

‘Super senior’

The proposed amendments allow for the creation of “super senior” priority investors who help bail out failed banks and provide the liquidity to enable original investors to recoup their money, David Gard, a member of Winterboer’s team, said in Johannesburg today. The new law will provide certainty to the market, he said.

Creating the “good bank” needs additional liquidity, and “SARB is to provide that, but without putting taxpayers’ money at risk, so we needed to offer security,” he said.

Abil’s senior debt holders probably don’t understand why the bill was put forward, Gard said. “Once they understand, we hope they will change their view.”

A successful lobby against the amendments by investors may force a change in the rescue, which has a limited period of support from the central bank, said Gard.

The amendment “puts us in a difficult position for having to fund the new issuances of any bank,” said Cadiz’s Blood. “It’s now very uncertain for bondholders. We don’t know what seniority our claims will have with subordinated debt and even senior debt if the curator can change capital structures significantly.”

‘Quicker resolution’

Banks have had to offer more attractive yields to sell their debt since Abil failed. Standard Bank, Africa’s largest lender by assets, offered the three-month Johannesburg interbank agreed rate plus 350 basis points to sell its 2.25 billion rand subordinated Tier 2 bond due December 2024 on Dec. 2. For the same type of debt instruments before Abil’s demise, Standard Bank’s peers FirstRand Ltd. and Nedbank paid on average the three-month Jibar plus 250 basis points.

The new law has potentially positive aspects, Gavin Wood, chief investment officer at Kagiso Asset Management, said by phone from Cape Town yesterday.

“It does seem to expedite the process if there’s a bank failure and may enable a quicker resolution, which should be good for investors,” said Wood. Even so, “it has the potential to have consequences that were unforeseen,” he said.

National Treasury spokeswoman Phumza Macanda couldn’t be reached on her office phone and didn’t respond to e-mailed questions. Director of Communications Jabulani Sikhakhane didn’t respond to a message left on his mobile phone or to e-mailed questions.

“We’re all trying to get our heads around how to deal with a situation like this,” Blood said. “There’s discontent in the investor base.”

©2014 Bloomberg News

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