Leon Worth Kirki­nis’s of Abil shares:

April 2012


Au­gust 2014



Back then Abil CEO Leon Kirki­nis told

Fin­week that he had no in­ten­tions of step­ping down from his job. Fast for­ward to 6 Au­gust this year, when the Abil board an­nounced that Kirki­nis had re­signed with im­me­di­ate ef­fect. The an­nounce­ment was ac­com­pa­nied by a trad­ing up­date that had yet another piece of bad news for the lender’s share­hold­ers. The group was ex­pect­ing a fur­ther full-year loss of R6.4bn, and it needed to raise more cap­i­tal to stay af loat – R8.5bn to be ex­act.

The share price was se­verely pun­ished, ex­pe­ri­enc­ing a steep dive from around R6/share to 29c/share in two days. Sub­se­quently, trad­ing of the stock on the JSE was sus­pended and a plan has been put in place to sal­vage the ‘good bank’ in Abil.

Look­ing at the demise of Abil in ret­ro­spect, a on­celoved stock, trad­ing at a his­tor­i­cally higher-than-av­er­age div­i­dend yield, with a price-to-earn­ings ra­tio at his­tor­i­cally lower lev­els while the rest of the mar­ket was trad­ing on the ex­pen­sive side, there were al­ways sig­nals of an ap­proach­ing storm. Not many sounded the warn­ing horn (at least not with en­thu­si­asm).

Or did mar­ket pro­tag­o­nists sim­ply choose to ig­nore the signs?

Was it all just greed?

•• HOw DiD THey nOT see THis cOm­ing?

Rem­i­nisc­ing on the value de­struc­tion of Abil, and sub­se­quent loss of cap­i­tal, the Barry Tan­nen­baum R10bn ponzi scheme comes to mind, although there are marked dif­fer­ences as well. There are sim­i­lar­i­ties in the tra­jec­tory of loss of in­vest­ment value in Abil, in­clud­ing how some in­vestors are re­act­ing now that the party has ended.

Re­call that the var­i­ous elite cap­tains of in­dus­try who were fore­most in­vestors in Tan­nen­baum’s scheme re­fused to have their names re­vealed, prob­a­bly be­cause they knew those who had idolised their in­vest­ment prowess would sud­denly ask: “But how did you not see this com­ing?”

In this con­text, the case is sim­i­lar to that of in­vestors in Abil, ex­cept that the lat­ter were mainly in­sti­tu­tional funds in­vest­ing money on be­half of their clients and not for their per­sonal port­fo­lios. That has dif­fer­ent con­se­quences. Still, how did they not fore­see this? Var­i­ous in­sti­tu­tional in­vestors kept on pil­ing up the Abil stock in their port­fo­lios, some as re­cently as the month be­fore the trad­ing up­date that caused the price to col­lapse. That buy­ing was in­vari­ably a sign of their con­fi­dence in the lender to re­ward their in­vest­ments. How­ever, try­ing to get their com­ments now that all is said and done is al­most im­pos­si­ble. They sound like they’ve all been through a pri­mary school recita­tion say­ing that “it’s a sen­si­tive is­sue, and we’re not com­ment­ing on the story”. Eat­ing hum­ble pie, per­haps? It is in­deed a sen­si­tive is­sue be­cause peo­ple have lost their hard- earned money as a re­sult of their de­ci­sions. An­a­lyst at 36ONE As­set Man­age­ment Jean Pierre Ver­ster con­curs. “A lot of in­sti­tu­tional in­vestors that have been buy­ing Abil since about two years back had to have been blinded by their own bias, lack of per­spec­tive and greed. I can­not see how any­one who would have done their home­work ended up with a ‘ buy’ out­come if not for the afore­men­tioned rea­sons.”

Ver­ster him­self is on record as short- ing the stock ag­gres­sively in re­cent months, and is said to have made close to R100m for his clients in the process.

There were clear in­di­ca­tions from var­i­ous quar­ters, in­clud­ing the Govern­ment, that the sus­tain­abil­ity of Abil’s busi­ness model had be­come un­cer­tain. Its de­te­ri­o­rat­ing share price bears tes­ta­ment to this no­tion.

Says Owen Nkomo, CEO of Inkunzi In­vest­ments: “The truth is that, for a change, [re­cent] gen­eral mar­ket sen­ti­ment said the stock was al­ways a short, hence the short-in­ter­est. The in­vest­ment in Abil by the big fund man­agers was prob­a­bly well cal­cu­lated, but the ex­tent of the de­cline in col­lec­tions, and the mag­ni­tude of cap­i­tal re­quired to buy the busi­ness time to re­cover, had been mis­cal­cu­lated. This was a clas­sic mir­ror image of the US credit crises, where some in­vestors thought Lehman was too big to fail.”

FIN­WEEK les­sOn: cOn­Trary TO wHaT yOur in­vesT­menT man­ager will Tell yOu, DOn’T al­ways ig­nOre THe nOise. wHere THere’s smOke, THere’s Of­Ten fire.

kirki­nis THe cHarm­ing Op­Ti­misT

There are just some com­pa­nies that will al­ways have that one person who is (and per­haps will al­ways be) sys­tem­at­i­cally and, in many cases, emo­tion­ally linked

to the busi­ness, in our minds at least.

Berk­shire Hath­away has War­ren Buf­fett. (Although Berk­shire’s his­tory goes back to 1839 with Oliver Chace.)

Ap­ple Inc has Steve Jobs (he es­tab­lished Ap­ple with Steve Woz­niak and Ron­ald Wayne).

African Bank has Leon Kirki­nis. (African Bank dates back to the Six­ties, with Sam Mot­suenyane head­ing its cre­ation with the Na­tional African Fed­er­ated Cham­ber of Com­merce and In­dus­try, or Naf­coc.)

Kirki­nis, with his part­ner Gor­don Schachat, who’d made money from con­struc­tion, bought African Bank from Naf­coc in 1999 and merged it with Theta Se­cu­ri­ties, a busi­ness started by Kirki­nis in 1993, with the aim of us­ing cap­i­tal mar­kets to pro­vide f und­ing where tra­di­tional banks would not.

Since then Kirki­nis has been the chief ex­ec­u­tive of African Bank, a feat that has been a source of com­fort but also a thorn in the side of in­vestors. In essence Kirki­nis be­came African Bank. No mat­ter what t he bad news was, if Kirki­nis said things would be all right, the am­ber lights sud­denly be­came green again and in­vestors would re­sume pil­ing up the stock.

Ves­tact por t f ol i o man­ager Michael Tre­herne re­minds us that Kirki­nis has a good track record with the lender and owns 22m of its shares. “All good rea­sons to value his opinion,” he says.

In a 2013 re­search pa­per pub­lished in the Strat­egy Man­age­ment Jour­nal, Xuem­ing Luo ( Fu­dan Univer­sity, China), Vamsi Ka­nuri (Univer­sity of Mis­souri, USA) and Michelle An­drews (Univer­sity of Texas, USA) ex­am­ine whether CEO ten­ure mat­ters. This is what they had to say: “Dur­ing their early ten­ure sea­sons, CEOs tend to learn rapidly and are will­ing to take risks. As their ten­ure pro­gresses, they es­pose new ini­tia­tives and ex­pand their knowl­edge and skill reper­toires, thus im­prov­ing firm per­for­mance. In their later sea­sons, how­ever, CEOs my­opi­cally com­mit to ob­so­lete par­a­digms, be­come risk-averse and stale in the sad­dle, and tend to adapt less to the ex­ter­nal en­vi­ron­ment, thus hurt­ing firm per­for­mance. In sum­mary, the re­la­tion­ship be­tween CEO ten­ure and firm per­for­mance over the CEO’s life cy­cle can be vi­su­alised as an ‘in­verted U’.”

36One’s Ver­ster agrees, in part, to this no­tion. He be­lieves that the risk does in­crease with a long CEO ten­ure



in that they can lose their sense of re­al­ity, but he points out that Buf­fett has been run­ning Berk­shire for about 50 years and is still re­garded as the best man for the job.

“But it is not only the ten­ure that we should look at. CEOs can be at the helm for two years and lose their sense of re­al­ity [or run a busi­ness for 50 years and still be very much in touch with re­al­ity]. CEOs need to be re­al­ists,” he says, adding that Kirki­nis was rather a charm­ing and overly op­ti­mistic CEO, but also one who was emo­tion­ally in­vested in the bank un­til the bit­ter end.

Kirki­nis has seen the value of his 22m shares in Abil, at one point val­ued at over R500m, plum­met to a pal­try R7m.

Ver­ster says that as­set man­agers and in­vestors alike should be scep­ti­cal when man­age­ment al­ways tells a good story. “Al­ways ask why un­til their ‘why’ is no longer an­swer­able or pro­duces a dif­fer­ent an­swer to the ini­tial an­gle pro­vided. It’s the only way to keep man­age­ment in check with re­al­ity.”

No mat­ter how bad the news was, in­vestors would al­ways leave the Abil an­nual gen­eral meet­ing with con­fi­dence

and smiles on their faces thanks to Kirki­nis’s charms, said one share­holder at the lender’s AGM in Fe­bru­ary.

This is a les­son that CEOs them­selves must be hon­est when things aren’t so rosy. One an­a­lyst gives In­victa Hold­ings CEO Arnold Gold­stone as an ex­am­ple of such a straight and hon­est top man­ager. In July, just a month af­ter the in­vest­ment hold­ing group re­leased its year- end re­sults, which showed nor­malised HEPS growth of 15%, the group re­leased a vol­un­tary trad­ing up­date warn­ing share­hold­ers of a pos­si­ble 30% drop in nor­malised HEPS for its first half-year pe­riod.

FIN­WEEK les­son: be scep­ti­cal when the news is al­ways good, be­cause how CAN the stoRy al­ways

be good?

Rat­ing agen­cies aRe al­ways be­hind the cuRve

The ef­fi­cacy of rat­ing agen­cies came to the foreground af­ter the global f inan­cial sys­tem was brought to its knees by the US sub-prime loans cri­sis in 2007. Ac­cord­ing to the US Fed­eral De­posit In­sur­ance Cor­po­ra­tion, “the term sub­prime refers to the credit char­ac­ter­is­tics of in­di­vid­ual bor­row­ers. Sub-prime bor­row­ers t yp­i­cally have weak­ened credit his­to­ries that in­clude pay­ment delin­quen­cies and pos­si­bly more se­vere prob­lems such as write-offs, judge­ments and bank­rupt­cies.

“They may also dis­play re­duced re­pay­ment ca­pac­ity as mea­sured by credit scores, debt-to-in­come ra­tios, or other cri­te­ria that may en­com­pass bor­row­ers with in­com­plete credit his­to­ries. Sub-prime loans are loans to bor­row­ers dis­play­ing one or more of these char­ac­ter­is­tics at the time of orig­i­na­tion or pur­chase. Such loans have a higher risk of de­fault than loans to prime bor­row­ers.”

Sounds fa­mil­iar. The up­surge in the grant­ing of these loans was driven mainly by in­vest­ment de­mand into the se­cu­ri­ties that housed such loans, which in turn was driven by the rat­ing agen­cies’ pos­i­tive in­vest­ment grades given to these types of loans.

The il­lu­sion is that some in­vestors are likely to be trapped into think­ing that the rat­ing agen­cies are en­tirely in­de­pen­dent in­sti­tu­tions. By in­de­pen­dent we mean that rat­ing agen­cies act on in­for­ma­tion they have been given by the com­pa­nies they are rat­ing. Heiner Flass­beck, direc­tor for the divi­sion on glob­al­i­sa­tion and devel­op­ment strate­gies for the United Na­tions Con­fer­ence on Trade and Devel­op­ment (UNCTAD), has said: “In­deed, they have played the op­po­site role and made the mar­ket even more opaque. As in all for­mer crises, agen­cies were too op­ti­mistic. This is the sys­temic prob­lem. Rat­ing agen­cies nor­mally re­spond that their rat­ings in­clude dis­claimers that clar­ify that they are paid by the com­pa­nies they rate and that rat­ings are only opin­ions and not ac­cu­rate pre­dic­tions of the risk of a given in­stru­ment. The prob­lem is that rat­ing agen­cies play an un­am­bigu­ous role in the cur­rent reg­u­la­tory en­vi­ron­ment as it ren­ders rat­ing de­ci­sions im­por­tant in es­tab­lish­ing what as­sets can be held by cer­tain types of fi­nan­cial in­ter­me­di­aries.”

Ver­ster reit­er­ates that as in the case of the 2007/08 global f inan­cial cri­sis, where rat­ing agen­cies were far be­hind the curve with their rat­ings, the same can be said now of their rat­ings on Abil. He ex­plains: “The way rat­ing agen­cies func­tion is in ret­ro­spect, al­ways af­ter the fact. They have to wait for fi­nan­cial re­sults to pre­pare their rat­ings, whereas an­a­lysts work in a prospec­tive and pre­emp­tive man­ner be­fore fi­nan­cial in­for­ma­tion has been re­leased.”

In that way an­a­lysts can help in­vestors pre­pare and re­po­si­tion their port­fo­lios in light of what can be ex­pected, Ver­ster adds.

Act­ing on the in­for­ma­tion they had been given, “I guess they, too, also un­der­es­ti­mated the work­ing cap­i­tal

re­quire­ments of the busi­ness [like Abil did], es­pe­cially the cash drain­ing re­tailer El­ler­ines, which is strug­gling with a slow­down in the econ­omy, bad debts and lim­ited new busi­ness,” says Nkomo.

El­ler­ines re­quired fund­ing sup­port of a min­i­mum of R70m a month. Nkomo con­tin­ues: “Peo­ple had bet that El­ler­ines would be sold and some re­sources would be avail­able from the sale. This had been a clever trans­ac­tion in the begin­ning, with a drive to make it easy for con­sumers to get loans, and con­ve­niently go

and buy fur­ni­ture from

El­ler­ines. But once the econ­omy started go­ing south, in­stead of hold­ing back on loan is­suance, as the big banks started to do so [hold back], Abil in­stead reloaded its fire power.”

Another en­cour­ag­ing fac­tor for many would-be in­vestors was Abil’s abil­ity to raise cap­i­tal from the debt mar­ket to fund its un­se­cured lend­ing growth. “Their abil­ity to al­ways raise cap­i­tal was a com­fort for share­hold­ers,” Nkomo says.

The cap­i­tal-debt mar­kets (where Abil raised most of its cap­i­tal to fund its growth) uses, as part of its bas­ket of in­stru­ment mea­sures, rat­ing agen­cies’ opin­ions to for­mu­late a de­ci­sion on whether or not to debt fund a par­tic­u­lar se­cu­rity.

FIN­WEEK les­sOn: read The fine PrinT. raT­ing agen­cies are Paid by The

cOM­Pa­nies They raTe!

Mar­cus: abil’s whiTe knighT... Or is she?

It was mid­day on Sun­day 10 Au­gust when

Fin­week re­ceived a note an­nounc­ing the South African Re­serve Bank’s (SARB), rather ur­gent, press con­fer­ence on Abil, sched­uled for 16:00 that day. The ur­gency of the an­nounce­ment mir­rored the calami­tous state that Abil had found it­self in only two days af­ter it re­leased a shock­ing trad­ing up­date. The value of the stock had plunged nearly 90% over those two days.

Re­serve Bank Gov­er­nor Gill Mar­cus an­nounced that African Bank had been placed un­der cu­ra­tor­ship to be led by Tom Win­ter­boer, the fi­nan­cial ser­vices in­dus­try leader for Africa and a mem­ber of the global fi­nan­cial ser­vices lead­er­ship team at Pricewater­house­Coop­ers (PwC).

While fur­ther de­tails on the cu­ra­tor­ship plan for Abil are ex­pected in due course, the ba­sic out­line of the plan is a sep­a­ra­tion of a ‘good bank’ from

the ‘ bad bank’. Lo­cal banks, in­clud­ing Stan­dard Bank and In­vestec, have teamed up with the Pub­lic In­vest­ment Cor­po­ra­tion to form a con­sor­tium that will un­der­write a R10bn cap­i­tal rais­ing to breathe life back into Abil. The SARB will then ab­sorb the ‘ bad bank’ while the ‘good bank’ will be re-listed in due course where cur­rent eq­uity hold­ers of Abil will have an op­por­tu­nity to take up eq­uity stakes.

The move by the Re­serve Bank has been hailed by some as a fair and swift ac­tion that is the best so­lu­tion for our lo­cal bank­ing sys­tem. But was it too late? Nkomo seems to think so, “But luck­ily for the coun­try Abil is the only in­sti­tu­tion at this stage that may need this kind of res­cue. As long as the rest of the un­se­cured lenders re­main un­listed, I imag­ine the li­a­bil­ity will not be for the SARB to bear, since it does not fall un­der its su­per­vi­sion.”

Should the SARB have in­ter­vened ear­lier, though? Some think not. “While the out­come [the SARB’s plan] is prob­a­bly best for all in­volved, my only crit­i­cism is that the Govern­ment is step­ping into the pri­vate sec­tor’s realm, and the tax payer will have to foot the bill if the bad loans are worse than es­ti­mated, which is a pos­si­bil­ity given the vast mis­cal­cu­la­tion by man­age­ment of the qual­ity of their book,” says Ves­tact’s Tre­herne. “Let con­sumers and com­pa­nies live by their ac­tions.”

In 2012, when the Abil stock was at its prime, the Re­serve Bank’s Fi­nan­cial

Sta­bil­ity Re­view showed that un­se­cured lend­ing ac­counted for just 8% of to­tal credit ex­tended by ma­jor banks. It said at such lev­els “un­se­cured lend­ing did not con­sti­tute a bub­ble”. How­ever, the SARB’s deputy gov­er­nor Le­setja Kganyago had sung a dif­fer­ent tune a week ear­lier. “Un­se­cured lend­ing [was] grow­ing too fast,” he had said.

While Ver­ster agrees that reg­u­la­tors are not there to man­age busi­nesses, fix their prob­lems and rec­tify bad de­ci­sions (com­pa­nies must be free to make their mis­takes), he de­clares that in the fi­nal anal­y­sis the SARB was still “the best player in this whole Abil saga” by in­tro­duc­ing a num­ber of mea­sures in­tended to curb un­se­cured lend­ing, in­clud­ing a range of credit af­ford­abil­ity ethics.

“The SARB must also be com­mended for en­sur­ing that the rest of the bank­ing sec­tor didn’t get ag­gres­sive ex­po­sure to this huge un­se­cured mar­ket,” adds Nkomo.

FIN­WEEK les­sOn:

in­vest in cOm­pA­nies with di­ver­si­fied in­cOme streAms. And gill mAr­cus is nOt yOur mOther – YOU hAve tO live with yOur Ac­tiOns And

de­ci­siOns. ■ ■

Leon Kirki­nis

Jean Pierre Ver­ster

Dr Sam Mot­suenyane

Arnold Gold­stone

Owen Nkomo

Gill Mar­cus

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