Money-Market Investors Risk Losses on African Bank Debt

By Robert Brand

Investors in South African money-market funds holding African Bank Investments Ltd. (ABL) securities are facing capital losses even as money managers slash interest payments to offset writedowns of the debt.
Funds may use one day’s worth of accrued interest to offset losses, the Financial Services Board said in a circular to money managers yesterday. That may not be enough to cover losses for some funds, according to Andrew Canter, chief investment officer at Futuregrowth Asset Management. The funds could also cancel units rather than impair their value, the FSB said.
“The fact is that some customers are going to wake up with less money than they had the day before,” Canter said by phone from Cape Town yesterday. “It’s likely to be an industry-wide phenomenon, and some funds will be more affected than others.”
African Bank, known as Abil, got emergency support from the Reserve Bank after the Johannesburg-based provider of unsecured loans lost most of its market value over three days last week. The lender will be split to create a bad bank with soured loans, while senior and
wholesale debt instruments will be transferred to the another bank at 90 percent of face value, the central bank said on Aug. 10.
Futuregrowth, which manages the 10.7 billion rand ($1 billion) Old Mutual Money Market Fund (INVMMKI), has a “very small” exposure to African Bank and investors in the fund won’t suffer “any material losses,” Canter said.

Across Board

Money-market funds overseeing about 270 billion rand have 1.3 percent exposure to African Bank debt, the FSB, which regulates financial services companies excluding banks, said in a statement.
South African money-market funds keep net asset values at 1 rand per share, meaning a rand invested can always be redeemed for a rand. A drop of net asset values below that level would risk shaking investor confidence in a market seen as low-risk and used by companies to raise short-term cash.
“We won’t break the buck,” said Paul Hutchinson, the head of retail business development at Cape Town-based Cadiz Asset Management Ltd., using a phrase that in the South African context refers to the net asset value of shares in a money-market fund falling below 1 rand. Cadiz will cancel some units and “I suspect that’s going to be the case across the board,” Hutchinson said.
Cadiz has 1.48 percent of its 2.1 billion-rand money-market fund invested in African Bank debt, he said by phone yesterday. Clients who reinvest interest payments at the end of August won’t have fewer units than before, Hutchinson said. Those who keep the cash will see a reduction in their holdings.

Small Exposure

Offsetting the entire capital loss with accrued interest would reduce the monthly yield by about a third, Hutchinson said.
Investec’s 27.6 billion rand Money Market Fund has a “very small exposure” to African Bank which “will be affected by the 10 percent reduction in wholesale deposit values,” the Cape Town-based money manager said in an e-mailed statement.
“This reduction will be implemented by a managed adjustment to the yield,” Investec said. “There will be no impact on the one-rand value of the money market units.”
Exposure to African Bank debt among South African fund managers isn’t high enough to cause “meaningful losses,” Leon Campher, chief executive officer of the Association for Savings and Investment South Africa, which represents money managers overseeing 1.64 trillion rand, said in an e-mailed response to questions yesterday.
African Bank said Aug. 6 that Leon Kirkinis, the CEO and bank’s founder, resigned, that it will post a record loss this year and needs a fresh capital injection, eight months after a rights offering. The lender’s shares were suspended from trading on the Johannesburg Stock Exchange yesterday after plunging 95 percent last week.