ABOUT A YEAR or two ago – when share prices were still doing well and banks were only too keen to lend money – crafty shareholders turned to Safex for loans. Little collateral was required and the interest wasn’t bad. For years, it was the custom in banking that you could borrow money against listed shares. Bank managers were prepared to advance 50% of the market value of the shares.
However, with single stock futures (SSFs) it was possible to convert more than 80% of the value of your shares into cash and still have the benefit of any increase in the share price – of course, any fall in the price was also for your pocket. But nobody thought about that last year.
Several directors made use of that, especially where the company was fond of buying other assets with its own paper. The transaction by Dave van Niekerk, of Blue Financial Services (BFS), in August last year is a good example. Blue had decided to take over Credit U Holdings and offered the company R278m in the form of 51,5m BFS shares at 540c/share.
The owners of Credit U indicated they’d also like to see some cash. Van Niekerk offered to buy half the BFS shares – 25,7m. But where to find the cash? So Van Niekerk bought 31m BFS shares on Safex through an SSF and the party on the other side of the transaction bought 31m shares from Van Niekerk on the cash market.
Van Niekerk was happy: he had enough money to pay for the 25,7m shares that Credit U didn’t want and he still had his 31m shares, even though it was in the form of a contract to buy them in the future at 668c.
The bank was happy: it had 31m shares to hedge the right it had sold – the so-called SSF – against a rise in Blue’s share price. Built into the transaction was also an interest profit for the bank.
But then the share prices started falling. That of Blue as well – and quickly – from 668c to the current 350c/share. Van
Niekerk was under pressure from two sides. Remember: he’s obliged to buy the 31m shares at 668c. His broker and its clearing bank want a variation margin to make up the loss between 668c and the current market price.
At the same time, the value of the 25,7m BFS shares bought from Credit U was also falling. That’s enough to snap the string in any bow.
But that wasn’t the only transaction in BFS. Last week, Absa had to take over 95,9m Blue shares – that’s 16% of the company – when Cortex could no longer collect the variation margin. Absa isn’t very impressed with the investment and it says it’s only holding it as stock to sell again as soon as possible.
That’s what clever thinking got out of Absa. If Van Niekerk had simply gone to his bank manager in the normal way to borrow money against Blue shares, he’d have needed at least double the cover. Even more, as Blue isn’t really one of the top 100 JSE companies. However, the smart dealers at the futures telephone thought differently and managed in a different way to advance Van Niekerk 80% of the value of the shares.
Banks apparently currently want four times cover for loans against listed shares, even if their prices are now 50% lower, and at least 10% deposit on a house.
At the top of the cycle, when shares were much more expensive, banks gave 80% advances on shares and up to 107% on the buying price of a house. Now that prices have fallen considerably they’re giving less. If you understand that logic you really should buy your bank’s shares.