Banks Lobbied in South Africa Over Preference Share Billions

A South African money manager is leading a drive to form blocks of investors holding preference shares in the country’s biggest banks to persuade the lenders to redeem the securities at the highest-possible prices.

About 22 billion rand ($1.8 billion) of the shares were issued a decade ago by banks including Standard Bank Group Ltd., Africa’s largest lender by assets, and FirstRand Ltd. mostly to expand share ownership in the country. Grouping the shareholders into voting pools will strengthen their bargaining power, said Greg Saffy, head of Johannesburg-based Cast Iron Capital, which has partnered with Exchange Sponsors Ltd. in the program.

A change in capital rules is prompting the banks to review the status of the preference shares, which typically have priority in the payment of dividends. The stocks, issued by the banks between 2004 and 2006, are known as non-cumulative, non-redeemable perpetual preference shares. Under Basel III regulations, they are no longer defined as core Tier-1 capital. As lenders try to boost their capital levels to meet the new benchmarks, they can buy back and cancel the shares or swap them for new instruments.

“Banks may have to do buybacks or replacements, but we’re going to lobby the banks for those shares,” Saffy said in an interview. By setting up the voting pool, Cast Iron Capital and Exchange Sponsors, an investment adviser, will form a market place where the shares can be traded, with the two firms earning performance fees for transactions, he said.

Framework Needed

While FirstRand is waiting for the central bank to publish a final framework before discussing its stance on the preference shares, according to spokeswoman Sam Moss. Nedbank Group Ltd. “will in principle offer a fair alternative,” said Mike Davis, the lender’s executive for balance-sheet management.

“At this stage in our capital planning we are considering various options as part of our current and ongoing capital plans,” Davis said. Options include a buyback, or swapping into either a new pre or post-tax instrument.

Investec Ltd. and Standard Bank weren’t immediately able to comment on the shares. Barclays Africa Group Ltd. declined to comment.

The South African Reserve Bank has been issuing capital framework guidelines for the lenders so as to ensure their compliance with Basel III rules.

Investors are able to start organizing themselves into the voting groups Monday, by visiting a website that Saffy and Exchange Sponsors have set up, or by calling the firms.

Six preference-share instruments from lenders including Investec, Nedbank and Barclays Africa are being targeted. Pooling the investors will enable them to negotiate with the banks for a cash payout at “an acceptable level,” Saffy said on the website.

“We’ve canvassed some of the institutional investors and there is keen interest and support for our initiative,” Saffy said. “We are in the process of collecting the votes from all holders and custodians of the instruments.”

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