Conatus’s Stemerman Advised Betting Against African Bank
Fifteen months before African Bank Investments Ltd. (ABL)’s rescue this week, David Stemerman told his fellow U.S. hedge fund managers to bet against the South African lender.
Stemerman, founder of $3 billion Conatus Capital Management LP, told a New York hedge-fund conference that African Bank had become vulnerable after aggressively building up its unsecured consumer lending investments and becoming too reliant on financing from the bond market.
“African Bank has engaged in risky lending practices such as very large unsecured loans, in this case offering the equivalent of $20,000 with not so much as a shoe for collateral,” Stemerman said at the Sohn Investment Conference in May 2013.
Three days ago South Africa’s central bank put the company into curatorship, akin to Chapter 11 bankruptcy, after the lender said it needed at least 8.5 billion rand ($800 million) to survive. The South African Reserve Bank divided its assets and arranged for institutions to underwrite a 10 billion-rand capital-raising exercise.
Shares in Abil, as the company is known, had plunged 98 percent in Johannesburg trading between Stemerman’s presentation and their suspension on Aug. 11. Debt holders won’t be paid when 1 billion rand of bonds mature next month and the securities have plunged in value.
Almost 20 percent of the lender’s stock was on loan as of Aug. 7, compared with the 0.95 percent average for South African equities, according to data compiled by London-based Markit Ltd. Short-sellers borrow shares and sell them, expecting to buy them back later at a lower price for a profit.
Stemerman, 45, started Greenwich, Connecticut-based Conatus in 2007 to wager on rising and falling stock prices. In last year’s presentation, he compared South Africa’s lending business with the U.S. housing crisis, saying many of the country’s bank branches had employees making lending decisions with less than a year of experience.
Taylor Ingraham, a spokesman for Conatus at ASC Advisors LLC, declined to comment on how the investment has performed and Stemerman’s presentation, parts of which were reported by FT Alphaville on Aug. 8.
Stemerman described the country’s lending practices as “reckless” and said some banks were offering to give loans of about $10,000 in 10 minutes.
“We believe that the credit cycle is turning, with retailers serving as the canaries in the coal mine for problems that will harm mainstream lenders,” he said.
Stemerman, who previously worked at hedge-fund firm Lone Pine Capital LLC, said African Bank, South Africa’s largest unsecured loan provider, had boosted lending by a compound annual growth rate of 30 percent over the last five years.
“The reserves African Bank has set aside on its balance sheet to cover potential future losses on loans that are currently nonperforming is lower than its competitors at about 60 percent, compared to an average of 70 percent for the big four banks,” Stemerman said. Should African Bank face an increase in loan delinquency, it will need to boost its coverage ratio by adding to reserves, he told the conference.
The Conatus founder predicted African Bank would post a loss this year as more borrowers fail to repay their loans.
Stemerman said African Bank depended almost entirely on wholesale funding from institutional investors in the bond market, unlike South Africa’s largest banks that rely on branch deposits.
“African Bank’s name is a bit of a misnomer,” Stemerman said. “We are all too familiar with the outcome of financial services firms that are dependent upon wholesale markets when investors lose confidence in their businesses.”
African Bank’s biggest shareholder, Coronation Fund Managers Ltd., apologized to investors yesterday and said it had learned a “sobering lesson” after its stake in the failed lender was wiped out.
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