Good Bank tries to do good

The Sunday Independent - - BUSINESS -

AFRICAN Bank, which was bailed out by the SA Re­serve Bank (Sarb) after a near-fa­tal col­lapse three years ago, has of­fered to re­pur­chase up to R3.2 bil­lion of do­mes­tic bonds in an ef­fort to re­duce the in­ter­est re­pay­ments on its debt.

The bank, which is also known as the Good Bank, said it had is­sued an invitation to note-hold­ers to sell any or all their hold­ings in cer­tain se­nior un­se­cured notes is­sued un­der its R25bn Do­mes­tic Medium Term Note pro­gramme.

The re­pur­chase comes as Moody’s said that de­spite South Africa’s back­drop of sub­dued eco­nomic growth, high un­em­ploy­ment and over­all weak con­sumer credit, the per­for­mance of se­cured loans was likely to hold up well over the next 12 months.

Ne­san Nair, a stock­bro­ker and port­fo­lio man­ager at Sas­fin Se­cu­ri­ties, said the African Bank of­fer was linked to debt in­her­ited from its pre­vi­ous in­car­na­tion. He said African Bank had been cre­ated when Sarb split the “good” cus­tomer loans of the old African Bank from the bad ones and housed it in a sep­a­rate en­tity.

It had been re­cap­i­talised by Sarb and the Pub­lic In­vest­ment Cor­po­ra­tion which, with all the coun­try’s banks, in­jected R10bn while the bond debt from the old African Bank was car­ried over to the new en­tity at 90 per­cent of its face value.

Nair said the new debt re­struc­ture had given rise to African Bank has made an of­fer to re­duce its debt. new bonds that were the sub­ject of Fri­day’s an­nounce­ment.

“As a con­se­quence, the cost of this debt, in terms of in­ter­est, is re­lated to the cost of the debt on the old debt in­stru­ments, which was very high.

“The Good Bank now sits with a large amount of cash hav­ing col­lected on the loans it is­sued to its cus­tomers over the last three years,” Nair said.

The cash earned less in­ter­est than the in­ter­est cur­rently be­ing paid on th­ese bonds. “The re­sult is a net in­ter­est loss which is re­ferred to as ‘neg­a­tive carry’. The board has there­fore de­cided to use the cash re­sources to buy back th­ese bonds in the mar­ket in which they trade. This means they will not have to ser­vice the in­ter­est on th­ese bonds go­ing forward, re­sult­ing in a net sav­ing.”

In May African Bank­said its op­er­at­ing profit had tanked to R83 mil­lion in the six months to March, down from R314m a year ear­lier. It at­trib­uted the de­cline to lower gains on bond buy­backs dur­ing the pe­riod of R11m from R251m a year ear­lier, say­ing the ma­jor­ity of the bond buy­backs had been com­pleted in the prior pe­riod.

Profit for the pe­riod was R53m from a R1.69bn loss a year ear­lier, while net cus­tomer ad­vances bal­ances were R19.7bn from R20.1bn last year.

The bank was bol­stered after S&P Global Rat­ings re­vised its out­look from neg­a­tive to sta­ble in April and af­firmed the B+/B global scale rat­ing.

The agency also said the bank’s cap­i­tal­i­sa­tion had im­proved, com­bined with bet­ter earn­ings than ex­pected. “The sta­ble out­look bal­ances the bank’s very strong cap­i­tal lev­els and lim­ited medium-term re­fi­nanc­ing risks against the weak eco­nomic en­vi­ron­ment that could neg­a­tively im­pact its earn­ings and busi­ness sta­bil­ity, and the longer term risk that the bank’s fund­ing is sus­cep­ti­ble to in­vestor con­fi­dence,” S&P said.

The main driver in the sig­nif­i­cant re­duc­tion in the bal­ance sheet has been the sys­tem­atic re­pur­chase of por­tions of the bank’s Euro Medium Term Note pro­gramme (EMTN) bonds in is­sue, last July and Septem­ber.

The to­tal rand equiv­a­lent of all EMTN bond re­pur­chases, to­gether with the early set­tle­ment of cer­tain rand bi­lat­eral fund­ing ar­range­ments, as at Septem­ber 30 last year, was R11.7bn, it was re­ported.

Dineo Faku

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