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Abil’s impact on your money market fund

The final reckoning. Update: Nedgroup Investments details included.

CAPE TOWN – Over the last couple of weeks, anyone invested in a local money market fund would have been understandably concerned about how their savings have been affected by African Bank (Abil) being placed under curatorship. Since the South African Reserve Bank (Sarb) announced that holders of Abil debt would take a ‘haircut’, many people have asked what that actually means for their money.

For a start, the Financial Services Board (FSB) has confirmed that 15 of the 43 registered money market funds in South Africa held Abil paper. In total, however, Abil debt instruments only made up 1.9% of the assets in these funds.

Five of the 15 funds exposed to Abil are run exclusively for institutional clients, leaving ten retail funds that have been affected. So the impact is not widespread, and the extent of the loss is generally limited. However, that doesn’t discount the fact that people have lost money.

“The reality is that if you had an investment in Abil debt in your portfolio on that fateful Sunday afternoon the nature of that debt changed dramatically,” says Conrad Wood, the manager of the Momentum Money Market Fund.

What is senior debt?

When it announced that Abil would be put under curatorship, Sarb made it clear that all of Abil’s senior debt would be written down by 10%. But it’s worth taking a step back to understand exactly what that means.

“Senior debt is at the top of the capital structure,” explains Wood. “At the bottom of Abil’s balance sheet are equity holders, who were the first to lose their money. Next in the line of fire were the preference share and subordinated debt holders. Sarb has indicated that the value of those instruments has gone to zero. 

“So those are effectively layers of loss absorption that needed to be wiped out first before senior debt holders right at the top were impacted.”

Effectively, senior debt holders are those who had deposits with Abil or who had bought Abil bonds.

However, following a global precedent, Sarb announced that the haircut wouldn’t apply to everyone. Abil’s few retail depositors did not take any loss at all.

“In this case, Sarb has said that bond holders and retail depositors are not ranked equally,” Wood says. “Because retail deposits are consumers on the street, they are protected and that money is guaranteed and unaffected by this. But bond holders and wholesale depositors, those in the investment management fraternity, were given this 10% haircut.”

Can the 10% ever be recovered?

There have been some suggestions that the loss suffered by senior debt holders may be reversed in future. One way of reading what Sarb has done is that the 10% was placed in the ‘bad bank’ and if Sarb is successfully able to recover the bad loans in that business, that money will be returned.

However, not everyone shares this view. Many analysts believe that the loss is final.

“Our view is that part of saving Abil is this 10% haircut for senior debt holders and that is not negotiable,” says Momentum’s Wood. “To us, it looks like the 10% will not go to the bad bank and there will not be an ability to participate in any recovery that may happen there. Hopefully we will be wrong on this for the sake of investors.”

How are money market funds affected?

The ten retail money market funds with exposure to Abil debt had to react immediately to Sarb’s announcement. On Monday 11 August, the day after Abil was placed under curatorship, they had to take steps to reflect the 10% loss of value in their Abil debt.

There were two ways of managing this. The first was for these funds to take the loss out of any interest, or yield, that was earned on that day. In other words, the fund would write off any growth to offset the 10% drop in value of its Abil holdings.

However, for funds that had larger positions in Abil, one day’s worth of interest was not enough to cover the whole loss. In these cases, funds had to reduce the number of units held by each of its investors.

The reason for this is that all money market funds in South Africa have a fixed unit price of 100 cents. So asset managers cannot change the price of units. The only way to take a loss is to reduce the number of units in the fund.

The below table shows exactly the extent of the losses suffered in all ten of the retail funds affected and how the loss was managed.

Money market funds affected by Abil senior debt ‘haircut’

Fund

Loss

Method

Absa Money Market Fund

0.319%

Yield and unit reduction

Cadiz Money Market Fund

0.130%

Yield and unit reduction

Discovery Money Market Fund

0.050%

Yield reduction only

Old Mutual Money Market Fund

0.090%

Yield reduction only

Symmetry Money Market Fund

0.050%

Yield reduction only

Investec Money Market Fund

0.100%

Yield reduction only

Momentum Money Market Fund

0.100%

Yield and unit reduction

Nedgroup Investments Money Market Fund

0.050%

Yield reduction only

Prudential Money Market Fund

0.016%

Yield reduction only

Stanlib Money Market Fund

0.16%

Yield and unit reduction

What is side-pocketing?

While these money market funds were able to write-down the value of their Abil exposure as outlined above, there was also a second part of the equation they needed to deal with. That is the fact that Abil debt has become a non-performing asset as it is no longer paying any interest. It is also not trading and so impossible to sell.

For this reason, the FSB announced that it would allow funds to “side-pocket” their Abil holdings. That means that funds are able to take the Abil debt out of their funds and put it into side funds that are still owned by the same unit holders, but cannot be sold.

The motivation for doing this is to protect investors from any further impacts and also to ensure that investors coming in and out of the fund are fairly treated. Those buying into a fund that has now side-pocketed its Abil debt will not be buying any of that exposure. And likewise, anyone selling out of such a fund will not leave the remaining investors in the lurch by leaving them with the Abil debt on their hands.

However, it does mean that investors will see a further reduction in the value of their money market investments. This value is not totally lost, however, as it is merely set aside in a separate vehicle. The Abil debt will continue to accrue interest, that will be paid at a later stage, but it’s unclear what the value of that interest will be.

Of the ten retail funds that had Abil exposure, three have side-pocketed that debt. Two others have removed the exposure completely – Absa, by transferring it into the parent bank, and Nedgroup Investments by selling it off.

The funds that have side-pocketed their holdings are the Cadiz Money Market Fund, Momentum Money Market Fund and Stanlib Money Market Fund.

Discovery, Investec, Old Mutual, Prudential and Symmetry have not employed side-pocketing at this stage.”

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