African Bank Investments Ltd., South Africa’s largest provider of unsecured loans, will need to bolster capital levels to encourage bondholders to roll over debt, according to Sanlam Investment Management.
“African Bank has lost control of their own destiny,” Kokkie Kooyman, the head of Cape Town-based Sanlam Global Investments, which has $900 million under management, said in an interview due to be published today in Bloomberg’s South Africa Funds GO newsletter. “The market has lost confidence in them with the recent downgrading of their debt to junk status. This puts enormous pressure on management.”
African Bank sold 5.5 billion rand ($511 million) of stock to existing investors at 8 rand each in December. Since then, it reported a record fiscal first-half loss as unemployment of 25 percent and a shrinking economy left consumers struggling to pay debt. In May, Moody’s Investors Service cut the lender’s foreign rating a step to Ba1, one level below investment grade. The stock is down 44 percent this year, the biggest fall among 164 members on the FTSE/JSE Africa All Share Index.
“Overseas bondholders, at maturity, are not going to roll over their bond holdings unless African Bank gets additional capital,” said Kooyman. “The market is saying, you must raise more capital, but should African Bank come to the market and ask for another 2 billion rand to 3 billion rand, it would have to be at a large discount.”
In the next two months, African Bank has three bonds maturing worth 1.1 billion rand, according to data compiled by Bloomberg. Yields on the lender’s October 2017 Swiss franc notes have dropped 61 basis points to 6.73 percent on July 4 since surging to an all time high on May 30. That day, which followed the Moody’s downgrade, the yield jumped a record 308 basis points, or 3.08 percentage points, to 7.34 percent.
The company manages its cash “on a portfolio basis,” which includes repaying bonds that are due, African Bank said in an e-mailed response to questions. It declined to comment on a rights issue as that would contravene stock exchange rules on disclosure. African Bank is due to give a third-quarter update on Aug. 6.
African Bank’s profit will improve from 2015 after tightening lending standards last July, Chief Executive Officer Leon Kirkinis said in a May 30 interview. The company has also been trying to sell its unprofitable furniture unit since January.
The lender offered a 38.7 percent discount on its previous rights offer. With the shares averaging 7.02 rand over the past month, a similar discount would price a sale at about 4.30 rand. African Bank dropped 0.3 percent to 6.73 rand on July 4, giving the company a market value of 10.01 billion rand.
“The market is deciding that the bank needs another rights issue to shore up its balance sheet,” Simon Fillmore, chief executive officer of Independent Securities, said by phone from Johannesburg on June 27. “The rights issue will result in a destruction of value, but equity holders wouldn’t have a choice” if they want the bank to survive, he said.