Bank logic

Finweek English Edition - - Openers -

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.

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