“When we bought exposure to African Bank’s senior debt, the Bank’s equity and subordinated debt capital provided a substantial buffer against the Bank’s underperforming loan book,” Allan Gray said in a statement.
“As it turns out, this buffer will substantially soften the blow for senior debt holders, but it is not sufficient to avert a 10 per cent write-down of the senior debt.”
Allan Gray added that after African Bank’s 6 August trading statement, which indicated that the bank expected headline losses of up to 6.4 billion rand, the investment firm marginally increased its position in the ordinary shares at prices roughly 50 cents per share.
African Bank is the banking arm and a subsidiary of [DATA ABL:African Bank Invrstments Limited] (Abil), a South African unsecured lender. [DATA CML:Coronation Fund Managers], which is Abil’s largest shareholder, was also affected by losses Abil incurred following its trading statement, and thereafter slashed its holding to less than nine per cent a few days later.
(READ MORE: Coronation held none of African Bank's debt, says fund)
The South African Reserve Bank (SARB) has since stepped in to assist African Bank by placing it under curatorship. In addition, the SARB announced that it would be buying African Bank’s ‘bad book’ for seven billion rand. A consortium including the Public Investment Corporation will also be underwriting a 10 billion rand capital raise for the ‘good bank’.
This underwriting move, according to Allan Gray, lends credibility to the SARB’s plan for senior debt to be transferred to the ‘good bank’ at 90 per cent of face value.
(READ MORE: Curatorship the start to saving African Bank)
“When more detailed terms of African Bank’s restructuring are announced it will become clear whether or not our assessment of the option value was correct, but in the meantime all ordinary shares are carried at zero value (placing zero value on the option to subscribe to the proposed capital raise for the ‘good bank’),” said Allan Gray.