- Spreads on the new debt instruments are too low: Futuregrowth
- Bank's revival comes as South African economy stagnates
African Bank Ltd., the rescued South African lender with new debt instruments that opened for trading this week, 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.
“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 71 billion rand ($4.7 billion). “There is still so much uncertainty around African Bank that it’s really hard to analyze 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 industrialized country have deteriorated. Inflation has accelerated to its fastest pace since June 2009, interest rates have increased four times since July, the local currency has plummeted and 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.
The lender failed after bad debts surged and it struggled to raise cash from capital markets, it’s main source of funding. As part of the resuscitation, the company was split into a good bank 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.”
There are 24 new listed instruments, including rand, dollar and Swiss franc bonds, with almost 60 billion rand 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 Ltd., which last week said it’s confident of achieving profit growth of more than 10 percent in 2016.
“The ‘good’ bank starts from a good position in terms of equity and cash,” said Craig Pheiffer, head of private client asset management at Barclays Africa Group Ltd. in Johannesburg. “Debt holders will undoubtedly watch developments like a hawk for any deterioration in that position.”
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.”
With inflation and interest rates rising and consumers under pressure, South African banks such as FirstRand Ltd. are cutting jobs, tightening lending criteria and forecasting rising bad debts amid slowing profit growth. The cost of funding has also risen since December last year when President Jacob Zuma unexpectedly fired the finance minister and the rand and bank stocks plunged.
“I’m not sure money managers will have the courage to tell their clients they’ve bought them African Bank paper,” David Shapiro, a director at Johannesburg-based Sasfin Securities, said. “Banks are going to be wary about building their lending books in an economy that is barely showing any growth. So for new African Bank to make headway, it will have to do business other banks don’t want. That will increase its risk profile considerably.”