WHAT YOU CAN LEARN FROM ABIL’S DEMISE
LESSONS TO BE LEARNT FROM THE COLLAPSE OF AFRICAN BANK
Leon Worth Kirkinis’s of Abil shares:
“YOU HAVE TO BE CAREFUL TO BUY THIS RIGHT NOW. THERE’S A RISK OF MORE DOWNSIDE,” SAID SEASONED TRADER GARTH MACKENZIE OF TRADER’S CORNER IN FINWEEK ’S 25 JULY 2013 ISSUE ABOUT EMBATTLED LENDER AFRICAN BANK INVESTMENTS LIMITED (ABIL). AT THE TIME THE STOCK HAD LOST SOME 60% OF ITS VALUE AFTER PEAKING AT AROUND R40/SHARE IN APRIL 2012.
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
“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.”
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
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.
invest in cOmpAnies with diversified incOme streAms. And gill mArcus is nOt yOur mOther – YOU hAve tO live with yOur ActiOns And
decisiOns. ■ ■
Jean Pierre Verster
Dr Sam Motsuenyane