The Financial Services Board (FSB) is considering relaxing the restriction on the investment term of financial instruments that may be held by money market funds to prevent investors who are exposed to African Bank Investments Limited (Abil) from incurring losses.
Abil was placed in business rescue last week.
The FSB’s deputy executive officer for collective investment schemes, Jurgen Boyd, also said this week that the side pockets (or retention funds) that the regulator allowed collective investment managers to set up when Abil imploded in August 2014 may continue for some time.
The managers of funds that were invested in Abil debt were given the option to transfer these assets to side pockets, which, in effect, were new portfolios that held only Abil debt, which currently cannot be traded. The main reason for placing the Abil assets in side pockets was to protect new and existing investors against potential losses.
Boyd says the FSB is considering granting concessions to money market funds that hold Abil debt following a recent announcement by Tom Winterboer, the curator of the imploded bank, about how the bank would deal with the debt.
Winterboer’s announcement followed an agreement between himself and asset managers and institutions that lent money to Abil before it collapsed that African Bank, known as the “good bank”, would issue new debt to replace the debt of Abil (the “bad bank”), but with a lower value and longer terms of repayment than the existing debt.
The repayment terms on the new debt are in conflict with the restriction that money market funds may not hold financial instruments with a maturity of more than 13 months.
There are 15 money market funds with an exposure of R1.19 billion to Abil debt. (This excludes the Absa money market fund, where Absa Bank took over the exposure.) Four of the funds have moved their Abil debt into side pockets.
Boyd says an exemption from the 13-month maturity requirement for the money market funds that accept the new debt is being considered to prevent the funds from having to sell these instruments quickly once they become tradable, because a fire sale of these instruments would prejudice investors.
Boyd says that, because the new African Bank debt will be tradable on issue, the collective investment scheme managers may also be given the discretion as to when to sell these instruments, having regard to what is in the best interest of investors.
He says money market and other unit trust funds held a total of R4.6 billion in side pockets on December 31, 2014. The debt was valued at 90 percent of its capital value on the date of the curatorship following a 10-percent “haircut” imposed by the South African Reserve Bank (SARB).
There are two types of Abil debt:
* Listed senior bonds with a face value of R40 billion. The lenders of this debt are first in line to be repaid. The debt is held in side pockets and has been reduced in value by 10 percent.
* Junior (subordinated or Tier II) bonds with a face value of R4 billion, which most asset managers wrote down to zero when the bank was placed under curatorship in August 2014. In terms of the agreement reached between asset managers and Winterboer two weeks ago, this debt will be replaced with new bonds with a face value of 37.5 cents in every rand.
All the new debt is expected to become tradable before the end of 2015, but it is likely to be traded at a discount to its issued value, so asset managers will have to decide whether to hold or sell the debt, and whether to continue to hold the senior debt in side pockets.
The lenders will still have a claim against the Abil “bad bank”.
However, the SARB, which bought R17 billion of non-performing debt from Abil for R7 billion as part of last year’s rescue package, and the senior bond holders, who will want the 10-percent loss restored, will be first in line if the “bad bank” is left with any assets. As a result, it is unlikely that the junior debt holders will receive any more money when a final decision is made about the outstanding non-performing debt.
Part of the reason for placing Abil under business rescue this week was to enable the under-performing debt to be collected. If Abil had been liquidated, the debt would have been written off.