African Bank has 2 options

2014-08-10 15:01

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There are really only two ways to save South Africa’s largest unsecured lender, African Bank Investments Limited (Abil).

According to Liberty Holdings CEO Thabo Dloti, the bank will either be bought by one of the larger banks or investors will bravely stay the course after suffering hundreds of millions of rands in losses this week.

If shareholders can keep their heads, it’s possible they can recover from that eventually, Dloti said after the release of Liberty’s results.

Liberty Life Assurance is Abil’s second- largest shareholder.

The collapse of Abil’s share price this week was nothing short of spectacular after it released a hair-raising trading update on Wednesday.

Shell-shocked shareholders sold more than a third of the company by Friday, erasing R9.8?billion of Abil’s value.

On Tuesday evening, Abil was worth R10.3?billion?–?with shares trading at R6.88 each?–?a shadow of the R30?billion bank it was a few years ago.

On Wednesday, the bank announced the resignation of founder and CEO Leon Kirkinis with immediate effect, predicted a loss of at least R7.6?billion for this financial year and said it needed a minimum of R8.5?billion in new capital.

On Thursday, Abil announced that it was placing its loss-making furniture company, Ellerines, into business rescue –?the first stop on the way to liquidation.

By end of trade on Friday, the bank was worth R450?million or 30c a share.

Abil is owed billions by poor customers to whom it has lent money with no security, but their incomes.

Of its R60?billion loan book, spread over 2.4?million debtors, R19?billion consists of “nonperforming loans”, meaning that clients had missed three months of repayments.

This situation is not improving fast enough despite a number of “derisking” initiatives.

Basically, Abil is reining in the most risky kind of lending it used to do by cutting the maximum loan amounts and the maximum repayment terms it used to offer.

In a conference call after the shocking update on Wednesday, chief financial officer Nithia Nalliah, who is now acting CEO, praised Kirkinis for building Abil “into the business it has been?–?until the recent past”.

Asked if Kirkinis was pushed, chairman Mutle Mogase replied he had offered to resign “a few times” before and “given the circumstances”, the board had now accepted.

Kirkinis and other board members shared the pain this week. Kirkinis owns about 1.47% of Abil, meaning his personal wealth just dropped by about R140?million. His Abil shares were worth about R150?million before the week’s announcements?–?now they are worth about R6.6?million.

Abil’s future hinges on first getting rid of Ellerines, raising a lot of money and then somehow splitting itself into two so that a “good bank” can be ring-fenced and salvaged.

Nalliah on Wednesday said the business case for unsecured lending still exists, although it would involve less risky lending than Abil has engaged in.

The largest of the shareholders that have just seen their investments evaporate is the Government Employees Pension Fund, which is managed by the Public Investment Corporation (PIC).

However, asset manager Coronation had invested more money into Abil via a number of funds under its control.

The second-largest loser is technically the two BEE schemes created by Abil in 2005 and 2008 (see boxes) which are now deep under water. Many of the major shareholders had pumped millions into Abil in December last year when it raised R5.5?billion in a rights issue?–?asking all existing shareholders to buy extra new shares.

However, when Abil had to raise R5.5?billion, it was a R14?billion company.

Now that it needs another R8.5?billion, it is a R450?million company, making a sufficient injection by existing shareholders somewhat unlikely.

The PIC has reportedly demanded an urgent new turnaround plan within a week.

WHO TOOK A HIT

.?Asset manager Coronation’s funds own a collective 22% of Abil. The value of that stake was about R2.2?billion, but has now been reduced to about R100?million. Funds like the Coronation Top 20 Fund and the Coronation Balanced Plus Fund acquired most of their Abil shares in the past year.

.?The Government Employees Pension Fund is Abil’s largest shareholder with 12.4% at the end of last month. This stake was worth R1.28?billion on Tuesday, but only R55?million on Friday. The fund had increased its shareholding in Abil from 10.6% last year by buying shares in the December rights issue.

.?Liberty Life owns 5.2% of Abil. The stake’s value dropped from R534?million to R23?million this week.

.?Momentum is another shareholder that significantly increased its stake in Abil in the past year. The 2.1% it owned at the beginning of this week was worth R200?million, the amount then fell to about R9.5?million.

BEE SHARES

African Bank’s two BEE schemes, Eyomhlaba and Hlumisa, are now in the red and worth roughly minus R137?million.

The schemes were created in 2005 and 2008 and own 5% of Abil?–?down from about 9% before the rights issue late last year diluted them.

Their collective shares in Abil are now worth R40?million at best, but they collectively still owe about R177?million for the shares, which were bought with debt financing at prices of between R10 and R6.

Roughly 14?000 black shareholders own shares in the schemes, including several thousand Abil employees Eyomhlaba and Hlumisa have shares that are traded over the counter on special exchanges.

These have been relatively slow to react to the collapse of the underlying asset.

Since Abil’s announcements, Eyomhlaba shares have ­fallen from R4.56 to 99c.

Hlumisa shares fell from R2.56 to R1.75 - still reflecting a far higher value for Abil shares than what actual Abil shares are fetching in the market.

ELLERINES

Abil’s woes may be coming to a mall near you after it ­announced that it was placing furniture group Ellerines under business rescue.

The group consists of 1?025 furniture stores that employ 7?790 people.

These fall under a number of ubiquitous South African brands?–?Ellerines, Furniture City, Dial-a-Bed, Wetherlys, Beares and Geen & Richards.

Abil bought Ellerines in 2008 for R9.2?billion. The premise was that people buying furniture on terms would get that credit from Abil.

In this week’s update, Abil announced that its retail division, which is essentially Ellerines, will suffer losses of “at least” R2.9?billion” in its current financial year?–?far worse than the loss of R328?million a year earlier.

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