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African Bank share price in freefall

Applies for business rescue of Ellerine Furnishers.

JOHANNESBURG – African Bank Investments Limited (Abil) continued to shed value on Thursday, falling over 89% to a low of R0.28.

It recovered to R0.92 over lunch, but had fallen 80.74% to R0.52 by 15:39.

“I still say it’s going to zero. My base case is still that the rights issue will not be supported, which implies the share price will fall to zero and regulators will help to carve the “bad” bank out of the “good” bank,” commented Jean Pierre Verster of 36ONE Asset Management, who has been short on Abil for a long time.

The listed entity still comprised both the “good” and “bad” bank (essentially furniture retailer, Ellerine Holdings) and no shareholders would want to see their money flushed away into the “bad” bank, Verster said.

Verster said Abil’s CFO Nithia Nalliah admitted on Wednesday that the only way for the business to be on a good footing was for the business to consist only of the “good” bank.

Verster said the size of the “bad” bank (and therefore the amount needed to ring-fence it) was R10 billion. He said it was more likely that Abil’s debt holders would be bailed out by the South African Reserve Bank (Sarb) than not.

They would then be swapped into the “good” bank (which might be bought by a bigger entity, or do a separate listing), and continue to collect on loans previously extended and manage collections (with the help of the Sarb) on the “bad” bank.

Ellerines

Abil announced on Wednesday afternoon that it had applied for the business rescue of the furniture retailer Ellerine Furnishers (EF), a wholly owned subsidiary of Ellerine Holdings. The lender said that as a consequence of EF’s financial performance, a decision had been taken that neither Abil nor African Bank would provide any further funding to either of the companies.

“The retail furniture business continues to trade at a loss which requires working capital funding from Abil and African Bank,” a statement from Abil said.

Bondholders will probably feel pain

Head of fixed income at PSG Asset Management, Ian Scott agreed that the Sarb would step in to contain systemic risk, but was doubtful that bondholders would get out of this cleanly. “Previously, equity holders would have taken all the pain. But in the new world of banking, with all the Basel III legislation, debt holders will have to take some haircut on their investments to bail it [Abil] out.”

Scott stressed that investors, financial advisors and asset managers with fixed income exposure should understand exactly what that exposure was and what the relevant asset manager was doing in terms of risk mitigation. “If your asset manager has a ‘no comment’ attitude, there is probably information in that as well,” he said. “I’m not saying Abil is going to default, but as a fixed-income investor I would not sleep peacefully knowing that Abil is in my portfolio.”

In a default scenario, money market funds would have to decide whether they break the rand or use some of their own money to make good on their promise to investors. Scott said questions should be asked around why local bond holders, which held around R30 billion in debt, kept buying fixed income investments as late as last year when the picture for Abil looked as bad as it did. He said much of this debt had been moved out of “shop window” funds into annuity and other funds (“darker places”) that were out of the scrutiny of the public eye. “There are asset managers with large exposures that are being opaque.”

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