African Bank an Over the Counter Buy for Open Short PositionRenee Bonorchis
African Bank Investments Ltd., suspended from Johannesburg’s stock exchange following its collapse last week, could be traded over the counter by hedge funds left with open short positions, according to 36ONE Asset Management.
“We’d be happy to buy current ordinary shares over the counter at 5 cents -- they’re not worth zero,” Jean Pierre Verster of Johannesburg-based 36ONE, which had an open short position on African Bank when the shares ended trading on Aug. 8, said by phone today. “We haven’t actively tried to purchase stock. It’s too soon and people are way too optimistic about the ‘good’ bank.”
Abil, as it’s known, collapsed last week after the lender said losses were mounting and it needed to raise at least 8.5 billion rand ($805 million). The South African Reserve Bank put the company into administration on Aug. 10 and divided it into a so-called “good” bank and a “bad” one, arranging for 10 billion rand in capital for the positive side. Shares and bonds were suspended the next day with the curator of the good bank saying shareholders may yet get something back.
“With junior debt holders and preference shareholders, there are 5 billion rand of other people in line ahead of the ordinary shareholders,” Verster said. “We’ve taken the view that there’s very little value in the good bank. On our analysis the new bank will have 36 billion rand in liabilities and 26 billion rand in assets. That hole will be hard to fill.”
South Africa’s Financial Services Board, which regulates mutual funds, doesn’t allow fund managers to trade over the counter. While one party has already approached 36ONE to sell stock, the deal couldn’t be done because of the FSB regulations, Verster said, without naming the potential seller. Strate, South Africa’s central securities depositary, has been overseeing the settlement of listed shares and bonds.
“The last trades executed Aug. 8 have settled today,” Dale Connock, head of risk at Strate, said in an e-mailed response to questions. “In the case of bonds this happened earlier this week.”
African Bank also had American Depository Receipts trading in the U.S. and managed by Bank of New York Mellon Corp. While the ADR program manager officially closed its Abil book on Aug. 12, traders can still exchange the receipts over the counter.
“Fresh ADRs can’t be issued or canceled now,” Lauren de Klerk, a vice president at Bank of New York Mellon, said by phone from Johannesburg. “The over the counter market can continue. Those who see doom and gloom will be wanting to get out while the opportunists will be buying.”
Abil fell to a low of $0.17 in U.S. over the counter trade on Aug. 8 and rose more than eight-fold to close at $1.41 yesterday. One ADR is worth five of Abil’s ordinary shares.
Shorting a stock involves selling a security borrowed from another organization. Traders who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder.