African Bank, the rescued South African lender with new debt instruments that opened for trading on Monday, is struggling to attract investors with yields that aren’t high enough to compensate for the risk of an economy hovering near a recession, money managers said.
AUTHOR: RENEE BONORCHIS AND COLIN MCCLELLAND | DATE: 2016/04/05 | SOURCE: FIN24
"We would definitely not be looking to buy any African Bank debt,” said Farzana Bayat, a senior portfolio manager at Cape Town-based Prescient Investment Management, which oversees R66bn.
“There is still so much uncertainty around African Bank that it’s really hard to analyse and ascertain the way forward.”
Since the collapse of South Africa’s largest provider of loans not backed by assets in August 2014, conditions in the continent’s most industrialised country have taken a turn for the worse. Inflation has accelerated to its fastest pace since June 2009, interest rates have been increased four times since July, the local currency has plummeted and the government’s debt is at risk of a downgrade to junk status.
While African Bank has a reconstituted board and plans to offer a broader range of financial products and services under its new banking license, including the expansion of retail deposits from 2017, the company will first need to prove itself, according to Futuregrowth Asset Management, Africa’s biggest fixed-income money manager.
New instruments
The lender failed after bad debts surged and it struggled to raise cash from capital markets, its main source of funding. As part of the resuscitation, bond investors were switched into new instruments, which carry the same premium over similar-dated government bonds as the old securities.
“The current spreads are inadequate and they might blow out significantly when they start trading,” said Wafeeqah Mallick, credit analyst at Cape Town-based Futuregrowth Asset Management, one of the senior debtholders that was swapped into the new notes. “The increased term isn’t necessarily compensated for, or the bad economy, or the new management team. The coupons are below where we see value.”
Lost opportunity
There are 24 new listed instruments, including rand, dollar and Swiss franc bonds, with almost R60bn of African Bank debt that was restructured, according to data compiled by Bloomberg. The lender’s floating rate notes due May 2018 are priced at 250 basis points over the three-month Johannesburg Interbank Agreed Rate, compared with a spread of 245 points for similar securities issued by Capitec Bank, which last week said it is confident of achieving profit growth of more than 10% in 2016.
The opportunity to buy the debt has passed because doubts over whether African Bank will be revived have passed and the yields have dropped, Nico Smuts, an analyst at 36ONE Asset Management in Johannesburg, said.
“The competitive environment is tougher now than in 2014,” he said. “In order to succeed, the new African Bank needs to diversify its product offering as well as its funding base.”
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