Securities market ripe for recovery after Abil’s fall

THE ASSET-BACKED securities market is ripe for recovery after the demise of African Bank showed investors that buying lenders’ debt carries risks, according to Futuregrowth Asset Management.

Securitisation of assets such as homes and cars might climb 13 percent this year to R8.5 billion after plunging more than 30 percent in 2014, Elena Ilkova at Rand Merchant Bank said. A rebound could be hastened as yields on South African bank bonds advanced to records relative to government debt, data showed.

The August collapse of unsecured lender African Bank signalled to money managers that they were exposed to losses in the case of bank failures, even as depositors were protected. This might push the market to diversify investments into instruments such as assetbacked securities, said Andrew Canter at Futuregrowth.

“Institutions can no longer see banks as risk-free assets,” Canter, chief investment officer of Futuregrowth, South Africa’s biggest private bond investor, said on March 9.

“Securitisations can be part of the solution and it could be a new boom time” as some investors sought alternatives to bank debt, he said.

The spread on FirstRand’s December 2024 rand note rose after African Bank’s failure and has continued to climb in the past eight months, reaching an all-time high of 222 basis points above similarly dated government debt on March 5. On August 5, the spread was 148 basis points.

“Our forecast for securitisations for the calendar year is R8.5bn with a possibility for a sizeable upside surprise depending on what banks choose to do,” Ilkova, a credit analyst at RMB, FirstRand’s investment banking unit, said on Thursday. Securitisations dropped to R7.5bn last year from R10.9bn in 2013, she said.

Securitisations are created when asset-backed loans, such as those for housing or vehicles, are pooled and sold in debt capital markets, funding the lending. Issuers such as SA Home Loans and SA Taxi, who make loans in specific industries with rigid rules, may benefit the most, according to Canter. Property finance could also be popular, because it was relatively cheap compared with the cost of construction and there was latent demand, he said.

Right plan

The South African Reserve Bank imposed a 10 percent loss on African Bank’s senior debt holders last year and said all other bond holders might lose everything unless the lender could be rescued and achieve an initial public offering.

The government is also seeking to amend banking laws to increase the powers of administrators of failed lenders, a move that may give debt holders lower priority when it comes to determining who recovers their investments.

“The South African banking system is very well regulated and the Reserve Bank’s plan was the right plan,” said Canter, whose firm holds African Bank’s senior debt.

Banks in South Africa are regulated by a unit of the Reserve Bank and are also subject to legislation, including the Banks Act, company law, the stock exchange’s listings requirements and Basel III rules. Close regulation meant that none of the four biggest lenders failed or needed a government bailout during the global financial crisis.

While Standard Bank dominates mortgages with a 35 percent market share, according to Reserve Bank data, home loans from organisations other than the biggest banks have been growing, accounting for a record 5.2 percent of the market in 2014.

“Securitisation is an effective tool for funding growing consumer lending books such as home loans, car loans, credit cards” and more, said Megan McDonald, the head of globaldebt primary markets for Standard Bank. “But for these books to grow strongly, a low interest rate environment is required with lots of liquidity available to consumers.”

While South African interest rates have been low, they are expected to increase. Consumers are confronting increased taxes, rising electricity costs and a partial reversal in lower fuel prices this year. Even so, these factors may not deter institutions from buying asset-backed securities.

“There has been a fundamental shift in the knowledge that institutions will take more pain” in the event of a bank failure, said Tracy Brodziak, a banks analyst at Old Mutual Investment Group in Cape Town. – Bloomberg THE DEPARTMENT of Communications is to publish the final Broadcasting Digital Migration (BDM) policy this week to begin the process of moving South Africa from analogue to digital terrestrial television.

The department said the new policy would clarify the use of a “control system” in set top boxes (STBs) that would enable households to switch from analogue to digital broadcast signals.

“The government has worked and will continue to work with all stakeholders in the economic cluster to ensure co-ordination of efforts and resources towards achieving a common objective,” said the department’s acting directorgeneral Donald Liphoko.

The government finally approved the Broadcast Digital Amendment Policy two weeks ago to make provision for the inclusion of a “control system” in STBs and endorsed commencement of the country’s digital migration.

Communications Minister Faith Muthambi said the government said it would provide free boxes to more than 5 million poor households.

Liphoko attributed delays in the migration to disagreements on the control system of the migration.

The migration’s programme head Solly Mokoetle said: “The government has assured Parliament that cabinet’s endorsement of an inclusion of a ‘control system’ aims to protect its multibillion-rand investment in the STBs from use outside of South Africa and that broadcasters who seek conditional access related to encryption of their broadcast content may do so at their own cost. Our responsibility is to protect the STB that government is making an investment in. The issues beyond the box or the encryption of the signal is not our domain.”

The department said Sentech was almost ready to distribute a digital signal and that the Independent Communications Authority of South Africa (Icasa) was finalising new Digital Terrestrial Television regulations. It said the South African Post Office was expected to implement plans to distribute the boxes.