Company share prices collapse to near 20-year low
INVESTORS fled African Bank Investments (Abil) yesterday, sending its shares tumbling in a bank that has a considerable footprint in the Eastern Cape and bringing it to the brink of bankruptcy.
Apart from the bank itself, one of its subsidiaries, Ellerine Furnishers has had to seek a business rescue to protect it from creditors.
Abil share prices collapsed to a near 20-year low as the lender looked unable to plug a R8.5-billion hole in its finances from a tide of unsecured loans gone bad.
Abil shocked the market on Wednesday when it said it needed to raise the R8.5-billion in new capital after warning of a massive annual loss, following which its chief executive quit.
That fundraising now looks nearly impossible given that the banks need several times more capital than it is currently worth.
Abil stock, which hit its 1995 level of 20c earlier in the session, stood at 85c by midday, valuing it at R1.2-billion – a precipitous fall for a company worth more than R21-billion at its height.
“Equity investors have thrown in the towel,” said one Johannesburg-based trader, who declined to be identified.
In an additional shock yesterday, Abil’s furniture retailing arm, Ellerine Furnishers, announced yesterday it had applied for temporary protection from creditors.
Ellerine said in a regulatory filing it had applied for “voluntary business rescue” under the Companies Act.
Abil acquired Ellerine Holdings in 2008, which is the parent company of Ellerine Furnishers.
Under South African law, business rescue provides temporary protection of a company’s property from creditors.
Abil’s troubles stem from a business model based solely on unsecured lending – high-margin loans not backed by collateral – which it offered widely to its core market of low-income borrowers.
But those clients have been hit by rising unemployment, food and fuel costs, as well as slow growth – and Abil has been slammed by their bad debts.
Several other commercial banks looked to unsecured lending to boost profits in recent years, but took on less risky loans and were nimbler than Abil in getting out of those positions when economic conditions took a turn for the worse.
Finance minister, Nhlanhla Nene, said yesterday there was no sign of broader contagion to South Africa’s robust banking sector.
Leon Kirkinis, who resigned as Abil’s chief executive on Wednesday, built the bank into one of South Africa’s best known lenders by targeting low-income borrowers with expensive credit – a previously untapped market of people who had been traditionally ignored by banks during apartheid.
But critics said such lending practices were unsustainable.
“The question now is how much the loan book is really worth and if that is enough collateral for equity holders after the bond obligations have been fulfilled,” said Nic Norman-Smith, chief investment officer at Lentus Asset Management in Johannesburg.
Abil said on Wednesday it would cleave off its bad loans in an attempt to create a ring-fenced “good bank”.
Its bad loans comprise nearly a third of its R60.1-billion book, while it had R47-billion worth of bonds and long-term debt on its balance sheet as of the end of March.
The Johannesburg Stock Exchange said it saw no reason to halt trading of Abil’s shares “at this moment”. — Reuters
African Bank tumbles as investors flee
INVESTORS fled African Bank Investments (Abil) yesterday, sending its shares tumbling in a bank that has a considerable footprint in the Eastern Cape and bringing it to the brink of bankruptcy.
Apart from the bank itself, one of its subsidiaries, Ellerine Furnishers has had to seek a business rescue to protect it from creditors.
Abil share prices collapsed to a near 20-year low as the lender looked unable to plug a R8.5-billion hole in its finances from a tide of unsecured loans gone bad.
Abil shocked the market on Wednesday when it said it needed to raise the R8.5-billion in new capital after warning of a massive annual loss, following which its chief executive quit.
That fundraising now looks nearly impossible given that the banks need several times more capital than it is currently worth.
Abil stock, which hit its 1995 level of 20c earlier in the session, stood at 85c by midday, valuing it at R1.2-billion – a precipitous fall for a company worth more than R21-billion at its height.
“Equity investors have thrown in the towel,” said one Johannesburg-based trader, who declined to be identified.
In an additional shock yesterday, Abil’s furniture retailing arm, Ellerine Furnishers, announced yesterday it had applied for temporary protection from creditors.
Ellerine said in a regulatory filing it had applied for “voluntary business rescue” under the Companies Act.
Abil acquired Ellerine Holdings in 2008, which is the parent company of Ellerine Furnishers.
Under South African law, business rescue provides temporary protection of a company’s property from creditors.
Abil’s troubles stem from a business model based solely on unsecured lending – high-margin loans not backed by collateral – which it offered widely to its core market of low-income borrowers.
But those clients have been hit by rising unemployment, food and fuel costs, as well as slow growth – and Abil has been slammed by their bad debts.
Several other commercial banks looked to unsecured lending to boost profits in recent years, but took on less risky loans and were nimbler than Abil in getting out of those positions when economic conditions took a turn for the worse.
Finance minister, Nhlanhla Nene, said yesterday there was no sign of broader contagion to South Africa’s robust banking sector.
Leon Kirkinis, who resigned as Abil’s chief executive on Wednesday, built the bank into one of South Africa’s best known lenders by targeting low-income borrowers with expensive credit – a previously untapped market of people who had been traditionally ignored by banks during apartheid.
But critics said such lending practices were unsustainable.
“The question now is how much the loan book is really worth and if that is enough collateral for equity holders after the bond obligations have been fulfilled,” said Nic Norman-Smith, chief investment officer at Lentus Asset Management in Johannesburg.
Abil said on Wednesday it would cleave off its bad loans in an attempt to create a ring-fenced “good bank”.
Its bad loans comprise nearly a third of its R60.1-billion book, while it had R47-billion worth of bonds and long-term debt on its balance sheet as of the end of March.
The Johannesburg Stock Exchange said it saw no reason to halt trading of Abil’s shares “at this moment”. — Reuters
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