African Bank: A Story Of Laws And Lending In South Africa
African Bank is primarily known these days for its unceremonious collapse.
The lender rose to prominence by borrowing money in order to provide unsecured loans to a lower-income, riskier clientele — a strategy that worked brilliantly until economic pressures hit the bank’s over-leveraged customer base.
Unlike traditional banks, African Bank wasn’t capitalized through customer deposits, meaning that it struggled to pay back its own debtors and eventually failed.
“Just because you call yourself a bank, doesn’t mean you are a bank,” John Foster, Africa editor of Debtwire, part of The Mergermarket Group, told AFKInsider.
“I can’t really understand how they managed to get away with their story, and how the people they were borrowing money from were so shortsighted.”.
In a country where 60 percent of credit-active consumers are at least one month in arrears on their debts, it’s hard to disagree. However, lend they did. And now, with the bank now under curatorship, a new part of the story has unfolded.
A new era — and new regulations
The curator, an outside administrator who has broad authority over operations, has endorsed a deal that would allow the bank to restructure and continue operations.
This deal essentially involves giving secured creditors (those with collateral) 90 percent of the value of their loans and giving all other lenders and equity-holders nothing at all.
The proposal comes alongside a proposed change to South Africa’s banking laws that would allow curators to make sweeping decisions about their wards’ assets and liabilities — without consulting existing creditors.
It would even allow the creation of “super senior” creditors, or new lenders who would get top priority over existing ones in exchange for their help in restructuring.
“The Banks Amendment bill allows the curator to borrow and to cede assets to new lenders, in effect degrading the original lenders,” Andrew Canter, chief investment officer of Futuregrowth Asset Management, told AFKInsider.
“It’s a bad thing for the original lenders, but it gives companies a new lease on life when they’re in trouble.”
The amendment is not without its detractors, most notably the existing unsecured financiers of African Bank, who are concerned about the implications of the law on their status.
Stanlib, an asset manager which lent to African Bank, said in a written statement to South Africa’s parliament that the rule would end up “treating some creditors less favorably than others.”
Of course, capital structures involve unequal treatment almost by definition: secured lenders are always paid out before everyone else.
“If you’re a junior [or unsecured debt-holder], from their perspective, and you had exposure to African Bank and it’s all gone wrong, you’d be squealing like a pig before the slaughter… But you’re a junior debtholder. You get a higher premium [interest payment] but you take more risk.” Foster said.
“This is the first time you had a default on that scale in South Africa, and I don’t think they ever thought it could happen, which is ridiculous.”
Indeed, bank failures in South Africa aren’t without precedent. Canter’s firm has counted 17 bank failures or near-failures from 1992 to 2012. “Whether it’s bad lending, fraud, liquidity mismanagement, speculative futures transactions — banks fail,” says Canter.
“There was even an original African Bank in the 1990s which failed due to bad lending and was taken over and relaunched with the same name.”
A wake-up call
For Canter, African Bank and the resultant changes to banking rules represent a wake-up call. “The headline is this,” says Canter, “If you don’t have a good credit process and a good lending process, no one is going to gear up your balance sheet,” by financing your business.
That said, don’t expect alternative lenders like African Bank to disappear from the marketplace. Canter says, “Payday lending is an industry with a couple hundred years of history, if not longer. It’s not going to disappear.”
In fact, “The global trends are for a migration of lending away from traditional banks and into special lending agencies.”
As banks come under pressure from tougher regulations and higher funding costs, Canter sees alternative lenders in various areas coming to the fore. But that of course means that lenders have one of two options: “Either you’re a classic microlender charging usurious rates, or you have to have a good balance sheet.”
In the meantime, the story of African Bank’s bad balance sheet continues, and it doesn’t look like the unsecured lenders will find much sympathy for their concerns.
“I think the curator was hopeful that somebody else might come to the table apart from the consortium [offering the existing deal], but the only deal on the table is the consortium deal,” says Foster.
“For now it’s Hobson’s choice, it’s either [the deal] or nothing, and if they don’t take the deal they’ll go into liquidation, which would cause a lot more pain, more unemployment… You don’t want that knocking on the door of the South African economy as a whole.”
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