AFRICAN BANK
How low can it go?
THE once mighty unsecured-lending behemoth African Bank (Abil) is now tottering on the point of collapse after this week revealing it would need yet another monster shareholder bailout in order to stay afloat.
Abil announced on Wednesday that it would need a minimum of R8.5-billion in extra funding from shareholders to continue as a going concern, barely months after it gobbled up R5.5-billion in a rights issue.
After bad debt continued to soar after years of out-of-control lending, the lender announced it would need to put aside a further R3-billion in provisions and that it expected a full-year loss of more than R7.6-billion.
The news caused panic in an already bewildered market, which was previously assured by CEO Leon Kirkinis that the R5.5billion raised last December would be enough to set the bank on a course to profitability.
Abil’s share price went into freefall, tumbling from an already dismal base of R6.88 to 31c on Friday, wiping out more than 95% of its value in three days. Since March last year, the share price has plummeted from R30 a share.
This underscored perhaps the most dramatic destruction in shareholder value in recent years, with more than R31-billion being wiped out since 2010, leaving a crippled entity worth barely R465-million by Friday.
The calamity has had a knockon effect, hitting even top-rated investment manager Coronation, which bought 22% of African Bank only last year.
This week, Coronation’s investment in African Bank shed R2.1-billion. But Coronation said its exposure was “not material in any of our client funds”. Still, Coronation’s share price shed 6.1% since Tuesday.
Kirkinis’s resignation on Wednesday came too late for investors who had lost faith in management. Analysts doubt that shareholders will be willing to throw “more good money after bad” to save the bank.
On Friday, Nedbank Private Wealth said in a research note: “Abil’s situation seems to have deteriorated to such an extent that no scenario can be ruled out — including the company going out of business.”
Dave Woollam, Abil’s former chief financial officer, is one who believe shareholders have now had enough. Woolam said investors now “have less to lose by walking away than following their rights” by ploughing in the R8.5-billion to keep it going.
“They announced the resignation of the CEO, admitted that the net asset value was about R1 a share, and then said they need to raise another R8.5-billion in fresh capital,” he said.
“Without a plan on how to do that, or a credible business plan for a new restructured Abil, that was suicidal and shareholders ran for the door.
“The power and responsibility to save the company now rests with the bond holders and funders,” said Woollam.
Abil’s business model is heavily reliant on wholesale funders.
The bank’s explosive growth was driven by the R54-billion it borrowed from wholesale funders, who will have to be repaid, but the low quality of its assets means there is now a growing gap between the value of its loan book and what it owes to these wholesale funders.
Research by Merrill Lynch shows that this “gap” was R6.5billion by last month — a hole that needs to be plugged by the R8.5-billion in new cash it wants.
At the time of going to print, Abil’s largest shareholders, Coronation and the Public Investment Corporation (PIC) (which holds 16.2%), had given no clear indication on whether they will support Abil’s rights offer.
The PIC said it had given Abil a
No scenario can be ruled out, including the bank going out of business
week to complete its turnaround plan before deciding whether to provide more support, according to Business Day.
If they don’t, there is a risk that debt funders will refuse to continue rolling over Abil’s debt, which could create a liquidity crisis and spark a collapse.
“The big concern for a lot of debt investors is whether Abil can continue to fund themselves and roll over existing funding maturities,” said Merrill Lynch analyst John Storey, who has repeatedly raised concern about the bank.
“They have roughly 42% of their R54-billion in debt maturing out to March 2015.”
Besides the bloodletting on the JSE, Storey said Abil’s bonds were “priced like it is not going to continue as a going concern. By late Friday, mid-pricing on the debt is probably 50c to the $1, which would indicate that the debt is getting priced at a recovery liquidation value.”
Abil “will cease to exist as it does today”, said Jean Pierre Verster, analyst at 36ONE.
“I do not think that the rights offer will be supported. It is too little too late,” said Verster.
“There has been a 99% value destruction, and the business is only existing as a going concern on the expectation that it will be able to raise the capital.”
On a conference call on Wednesday, acting CEO Nithia Nalliah said that while “we are not pleased about the numbers, we are going to take this business back to what it used to do”.
But Verster said the macroeconomic environment today was not the same as it was before, so a simple appeal to “return to the old” made no sense.
He said that this highlighted “the delusion of management”.
“The problem of Abil is not just one of extending loans too aggressively: it is a cultural problem of greed and overconfidence, and not being in touch with reality,” says Verster.
Woolam says the most likely scenario is that bondholders could convert their debt into equity to save the bank.
He says it is crucal that the bank’s 2.7-million customers who have borrowed more than R40-billion in unsecured loans continue to repay their debt.
“One possible scenario would be to strip the good assets out of Abil into a freshly capitalised and funded listed entity, and leave behind the bad assets and Ellerines, (which could be) wound up over a period of time.”