Hedge fund manager banks R100m on Abil

Cape Town - Every cloud truly has a silver lining as the R100m profit a local hedge fund manager made off the demise of African Bank Investments [JSE:ABL] (Abil) over the last few days showed.

36One’s Jean Pierre Verster told Biznews's Alec Hogg in an interview this week that his hedge fund took a bold move to “short” Abil – and banked R100m profit for clients as a result.

Verster said some people thought it was a “perverse incentive to see African Bank fail, but I don’t think we take any pleasure in this because there are real world implications, people losing their jobs for instance but yes, we’ve done well for our clients.”

He said 36One – the largest hedge fun in South Africa, with more than R4bn as a single hedge fund and more than R8bn through all its hedge funds – had between 1% and 2% short in African Bank. “That means we made 100% profit on that, and that comes to a round R100m, so it’s a nice number for our clients and we take performance fees off that number.”

Normally, Verster said, hedge funds don’t disclose how much money they make, but he wanted to tell people that they can’t retire. “It sounds like a lot, but in the context of our funds, it is 1%, so we made more in the last two years on Naspers [JSE:NPN] doing well than we did on African Bank failing.”

Unlike the 2008 crisis, Verster said no one could say that 36One’s shorting of this stock caused or was in anyway a reason for African Bank's failing.

It was variance perception that helped 36One have the foresight to see what was coming with Abil. “We saw the same facts, but we had a different perception,” he said. “We had a different interpretation of those facts, and what I think we saw are pieces of a puzzle, which gave us some confidence in thinking that there could be a scenario where African Bank fails.”

Listen to the interview:

One insight they had was the provisioning methodology of African Bank as well as Capitec [JSE:CPI]. “Capitec would see a loan as being non-performing, after one missed instalment,” he said. “Other big banks would see it as a non-performing after three months of missed instalments. African Bank saw it as a non-performing loan after five missed payments, so they were very, I would say, they were less conservative in their provisioning methodology.”

As a result of Abil, he said there would be some confidence implications for Capitec, “but we think they will be a net winner of the situation”.

CEO Leon Kirkinis's trait as being an optimist was dangerous in a changing environment, he said. “… in the context of a changing environment, new legislation, a strong growth period, which hides a lot of ills, one needs to be in touch with reality and through that over optimism …”

Verster said Abil also overpaid for the acquisition of Ellerine, a “business model that clearly was broken”.

Verster explained that the South African Bonds were not trading. “They are part of the suspension, similar to the Common Equity. Some money market funds and income funds have adjusted their evaluation or frozen that part of their portfolio, so some investors, when they request a redemption from an income fund of R100, might get R93 and R7 will be held behind, because that is the African Bank exposure. No one really knows the true value, but I would guess it would be close to 90% of the previous value.”

He said fund managers would not normally speak out about sensitive information, but this specific situation had allowed for insights into what happened.

In the whole reorganisation, there’s a good bank and a bad bank, said Verster. “The bad bank gets bought out of Abil at R7bn for R17bn loan book. That leads to an impairment of R10bn in the listed entity, so the listed entity is insolvent.

Read: Rescue plan for African Bank

“There is also a buy-out of the good book of R26bn from the listed entity into a good bank, so there’s an asset of 26. However, the debt holders also go long, which is 90% of R40bn of debt. That is R36bn, so you have 26 of loan book and 36 of the liability. That leaves a 10% funding shortfall. That’s where the consortium of banks are coming in.”

“The banks will want to exit because they are not in the business of owning stakes in other banks,” he said. “The good bank will then list and allow that consortium to be replaced as the shareholder, by public shareholders, so there’s quite a process still to come.  In that whole process there is some value attached to the current Abil shares …”

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