At least 50 mutual funds are seeking to isolate debt in the failed African Bank Investments Ltd. from their other investments, using a “side-pocketing” procedure allowed for the first time in South Africa.
The Financial Services Board, which regulates mutual funds, said on Aug. 15 managers with African Bank debt could separate the illiquid assets from more tradeable investments. Investors at the time of the collapse would own part of the new Abil portfolio and benefit from any increase in future value, while new investors will be protected from losses in the funds.
“Eleven portfolios applied yesterday (Monday) and were approved; a further 39 portfolios applied overnight, which we are currently considering,” Jurgen Boyd, deputy executive officer for collective investment schemes at the FSB, said. “A detailed list will be published on the FSB website, probably by close of business.”
Abil, as the lender is known, collapsed after saying on Aug. 6 it faced mounting losses and needed at least R8.5 billion to survive. Its senior and wholesale debt was impaired by 10% in a central bank rescue, while subordinated debt will be written off. Shares and bonds were suspended Aug. 11 and Johannesburg’s stock exchange hasn’t given a value for the securities.
“You can now carve out the bad assets,” Peter Blohm, senior policy adviser at Asisa, which represents money managers overseeing R1.6 trillion, said.
Fitch Ratings Ltd. upgraded Absa Money Market Fund’s national fund credit rating to AA+ from A after the fund passed its exposure to parent Barclays Africa Group Ltd. Abil debt was removed from the Absa Money Market Fund on Aug. 15 after Barclays Africa said the failed lender accounted for about R1.5 billion in the R50 billion portfolio.
“Side pockets could allow you to make it look like a portfolio’s performance is good,” Andrew Canter, chief investment officer at Futuregrowth Asset Management, said. The side-pocketing wouldn’t have been necessary if the Johannesburg Stock Exchange had provided a mark to market, a measure of the fair value, of Abil’s debt instruments and preference share accounts.
The African Bank crisis exposed inadequate administration systems and lack of preparation for such events among money managers, Magda Wierzycka, chief investment officer at Sygnia Asset Management in Cape Town, wrote in article published on news website Moneyweb Today.
The crisis also highlighted weaknesses in credit risk assessment and investment analysis, she wrote.
“The asset management industry and Asisa need to take a long and hard look at their processes and responses,” Wierzycka said. “More allocation of resources to administration and ‘back office’ operations, as opposed to ‘front office’ investment staff and their bonuses, would not go amiss.”
The FSB isn’t considering further measures to protect investors, though it plans to monitor market developments to decide whether further action is necessary, Boyd said.