Edition: Dec 2014 - Feb 2015
EXPERT OPINION

A significant event in corporate SA

STANLIB head of investments Herman van Velze discusses the African Bank debacle and lessons from it.


Van Velze . . . on the line

10 August 2014 will long be remembered for its significance in SA's financial markets. It was the day that the SA Reserve Bank (SARB) announced the first ever bailout plan for any SA bank. This had become the preferred regulatory intervention in other markets.

The country's dominant unsecured credit provider, African Bank, was placed under curatorship. Far-reaching capital structure impairments were announced, impacting its senior and sub-ordinated bonds. 

Certain STANLIB unit trust funds had either equity or fixed-income exposure to African Bank. A component of this exposure has been put into a retention fund, which will be accessible once African Bank's curator resolves its capital structure.

Our main aim in creating the retention fund is to protect our investors, both existing and new. It means that new investors will not be exposed to any African Bank assets. It also ensures that existing investors will not be prejudiced by other investors making withdrawals, and leaving the remaining investors with a greater share of the untradeable fixed-interest instruments.

Current status

The fate of African Bank now lies with the appointed curator. He has applied for the licensing of a new entity which is likely to be listed on the JSE during the first half of 2015. Announcements of further details and progress in this regard are to follow over the next few months.

Early indications are encouraging and the outlook for the African Bank is improving. It remains an operating entity with a book of customers who continue to pay back their loans. Should this trend persist in the medium term, the senior debt in the retention funds may be recovered.

Why did asset managers invest in African Bank?

Firstly, at the sector level, the unsecured-lending market is a growth industry not just in SA but in many emerging economies. Indeed, over the years a number of the larger SA banks recognised the opportunities in unsecured credit and also entered this market.

Secondly, the African Bank team had through a period of time demonstrated an ability to assess the inherent credit risk better than its peers. It had a competitive advantage in knowing how to price appropriately for this risk and to generate attractive returns on capital for shareholders.

Lastly, rating agencies consistently maintained an investment-grade rating on the bonds issued. The company also had capital in excess of regulatory requirements.

Learnings

Investment success is often about being willing to be different from the crowd. Many great investments begin in discomfort. Some examples from our financial sector include Investec (whose share price dropped below R30 in 2009 before recovering to its current levels over R100) and Old Mutual (which had touched lows below R5 in 2009, recovering to current levels above R30). The point is that, as investors, we have to accept that in trying to be right, there is the inescapable risk of sometimes being wrong.

Unforeseen circumstances, and the resultant unexpected losses at African Bank, have been upsetting for investors and fund managers alike. As an industry, events such as these truly reaffirm the need to remain committed always to doing what is best for our investors -- constantly re-evaluating and interrogating investment processes to ensure they are as robust as possible.

At STANLIB, any losses our customers feel are directly felt by our fund managers. The remuneration scheme for all our senior staff is aligned to the outcomes for our investors, which ultimately leads to the financial performance of STANLIB. In addition, senior staff are required to invest in the same client portfolios that they manage.

While the losses that have resulted from African Bank's demise have been deeply regretted by the investment industry as a whole, there are investment learnings that we as a fraternity can take to help ensure we move forward better equipped to prevent such an occurrence from recurring in the future. Some key learnings include:

  • The quality of corporate governance of any business one invests in is not a "nice to have" but is key to an investment case. The oversight role of the Board and the strength and independence of the Chairman are paramount to governance.
  • Lending practices need to be more closely scrutinised, together with credit-risk processes. There is a general need for better governance practices across the industry.
  • Going forward, we must be more circumspect when a business changes its core focus, as was the case with African Bank when it purchased furniture retailer Ellerines. A prominent international example is Enron which, having changed its business model and core focus, moved away from its strengths. This proved a distraction for its management, taking focus away from what it did well, with dire consequences.