Allan Gray's disclosure this week that it owns 6.88% of the equity in now defunct Abil led to many drawing the conclusion that the firm had abandoned its conservative culture and taken a serious punt as the bank was dying. The reality is somewhat different as chief investment officer Ian Liddle explained in this fascinating interview this morning. For one thing, as it already held around 75m Abil shares, Thursday's purchases were a topping up of a further 30m shares. Second, the team considered the purchase carefully before allocating one basis point of its capital under management on an option to participate when the failing bank was recapitalised. But there's bad news for last-minute Abil buyers hoping Allan Gray's option will reap rewards. Liddle admits the team worked off the information Abil provided in Wednesday's profit warning which painted a rosier picture than disclosed by the SA Reserve Bank on Sunday. As a result, Allan Gray has written off its entire holding in Abil shares to zero – some R482m but, in perspective, an overall knock on its three funds of under half a percentage point. – AH .[soundcloud url="https://api.soundcloud.com/tracks/163239497" params="auto_play=false&hide_related=false&show_comments=true&show_user=true&show_reposts=false&visual=true" width="100%" height="450" iframe="true" /].ALEC HOGG: Joining us now is Ian Liddle who's the Chief Investment Officer at Allan Gray. Ian, the whole Abil story prompted you to come out with an announcement, and I look forward to unpacking this with you. However, up until last Wednesday, how many shares in Abil did Allan Gray actually hold?.IAN LIDDLE: Collectively, across our client portfolios, it was less than five percent of the company. It was less than around 75-million shares..ALEC HOGG: So then, after the profit warning came out, you decided there was an opportunity there. You took it from 75-million to (by my calculations) about 103-million. Is that accurate?.IAN LIDDLE: That sounds about right, yes..ALEC HOGG: So round about 30-million shares in turnover of R711m I guess, is not… You certainly weren't the biggest buyer. Just a question on this one: when you saw the profit warning and the departure of Leon Kirkinis, what happens? What's the process that happens within an organisation like Allan Gray?.IAN LIDDLE: The first thing you do is reassess your assumptions and calculations as to the value of the company, which is something we did. When we bought the additional shares, it wasn't on the Wednesday. It was on the Thursday when the shares had fallen substantially. We only reviewed it as an option and I think there can be opportunities to make money from investing in distressed banks. We've done this in the past. We invested in BOE in March 2002, when the bank was in distress. The reason why there can be value in that option is that if you think there are potential people who will back the capital raise for the bank, what you have as shareholders, is a pre-emptive right of option to join and then subscribe into the new capital raise. .That can sometimes make you a lot of money as it did for us in 2002 with BOE. We reviewed the options and knew there'd have to be a capital raise and what we were buying was an option to subscribe to a future capital raise with a very, very limited amount of money. I think we should point that out that the Allan Gray Balanced Fund which is our unit trust, it was less than 0.3 basis points that we invested..ALEC HOGG: It's a big fund though, R100bn fund. .IAN LIDDLE: It was R100,000.00 of the capital of the value fund that we invested. When you buy options, you do realise that they can go to zero, especially in the case of African Bank because management didn't have a lot of credibility. There was certainly a lot of risk, so we certainly wouldn't put a lot of capital into the option. If you do have a strategy of buying cheap options over time, some of them will work out and some won't but if you're getting your sums right, then collectively, they should add to performance..ALEC HOGG: In a case like this, given that you were already a shareholder in Abil, would you pick up the phone to Kirkinis and ask him 'what's going on here, Leon' before doing any buying?.IAN LIDDLE: Yes. Remember, part of the announcement was that he left. We weren't one of the largest shareholders in African Bank, so we actually didn't even get an opportunity to speak to them until Friday. As events have unfolded, it's clear that management and the board didn't really have a good handle on what was going on anyway, so I'm not sure if it would have added much value. .ALEC HOGG: Did they tell you on Friday that things were dire or were they still quite optimistic that they could pull it out? I say this because Jan Myburgh of Saambou… Two days before Saambou went into curatorship, he was very upbeat and bullish on a radio program we used to have on Moneyweb. .IAN LIDDLE: I'm not going to comment on the specific call, but what I can say is that if you look at Abil's public announcement on Wednesday, they indicated that they'd taken an extra R3bn in provisions. They also indicated that the performing book was over R40bn. When we compare that to the Reserve Bank's announcement on Sunday, the Reserve Bank announcement indicated that the good bank was only R26bn in advances, net advances and that they'd be buying the book in the bad bank, which had a nett book value of R17bn. Those numbers are very different from the numbers that Abil put out on Wednesday morning..ALEC HOGG: So they didn't really have an accurate view of what's going on there. .IAN LIDDLE: We can't say that yet, because we don't know for sure. It might be that the Reserve Bank is buying the bad book for a very cheap price, which is why one of their shares that you had spoken about, has a potential for a claw back if that bad book performs better than the Reserve Bank expects. Clearly, African Bank management don't have a lot of credibility, but it's probably too soon to say now..ALEC HOGG: Well, we did have the curator coming out earlier this week, to say that the bonds that everybody – including yourselves – thought were going to be serviced (that the interest was going to be serviced) was not going to be serviced. There's therefore no interest on those bonds until the curatorship is over. I guess that is an indication that already, Tom Winterboer has found maybe worse than he thought..IAN LIDDLE: No, I wouldn't necessarily read that into it. The interest is still accruing on the bonds. When you come into a distressed bank as a curator – that would be the logical thing to do – to firstly, get your hands on the problem..ALEC HOGG: Okay, so we don't have to read too many more bad things into it. It was interesting. We spoke with Bert Griesel who was involved in the story at Unifer in the turnaround there – the final call back, as you mentioned – and he said that his message to the curator was 'however bad it looks now, it's actually a little bit better than the way you think it is'. I guess that's certainly, what shareholders will be hoping. .IAN LIDDLE: Yes. It's unclear whether shareholders are going to get anything out. Remember, we're already looking at a situation now with the benefit of hindsight, which is always 20/20. We have that announcement on Sunday now, which we can use. We didn't have time last week. If it is the case (that the senior bondholders take a haircut), then it could well be that equity holders end up with nothing if there are pre-emptive rights to subscribe to the capital raise. .ALEC HOGG: And the subordinated debt, which has also ended up with nothing and also stands closer to the benefits than equity holders..IAN LIDDLE: I think the equity holders will have some sort of pre-emptive right to subscribe to the capital raise. However, the question is 'to what extent is that diluted'. Are they extending the same option to other funders available?.ALEC HOGG: Ian, if you'd know what the Reserve Bank had announced on Sunday, on the Thursday when you bought the shares, would you have still gone ahead and bought them?.IAN LIDDLE: Probably not, no..ALEC HOGG: So the 50 cents or 30 to 50 cents price that some people were saying Allan Gray were very smart to go buy the shares at that level, would, to your view right now, actually not have been such a great move. Given, as you say, 20/20 hindsight, and you have more visibility..IAN LIDDLE: Once again, I must just stress for the sake of perspective: this was an extremely tiny investment, so I think that's the most important thing to point out – it was less than one basis point of our portfolios. If we're just talking from interest here and valuing the option, the value that we would put on the option is lower now after the Reserve Bank's announcement, than it was based on Abil's trading update on Wednesday..ALEC HOGG: But it would still have some value..IAN LIDDLE: It may, but it may not have much. As I said, it depends on the extent to which the preemptive right to subscribe to the capital raise is diluted and the disruptive questions that we don't know the answers to yet, so it's hard to say. In the meantime, what we have done is write Abil's shares held in our portfolios, down to zero..ALEC HOGG: Now, I ask this because if you go onto social media, there are a few people who clearly went in. We know. David Shapiro's close to these kinds of punters. We know that of the 711-million shares that traded hands last week, many of them were held by private investors and they're currently patting themselves on the back, thinking that they're going to have an insight or they're going to have a pre-emptive right to buy more shares in the new Abil, if you like. When you read it, according to where the equity shareholders stand in the line, people like Jean Pierre Verster are saying he's happy he's short at 31 cents. He probably thinks they may be worth nothing, if anything, or only one cent, if that. That's really, what I'm trying to get down to, just to give some clarity to these private shareholders who might be living in dreamland..IAN LIDDLE: I'm afraid it's clarity that I can't provide because this needs to be worked out. The curator's in charge and we need to see what kind of restructuring package the curator comes up with. .ALEC HOGG: The smart option though, is just write off – as Allan Gray has done. Write it off. Write off your equity investment and then, if you get something back, treat it as a bonus. .IAN LIDDLE: Yes. We have to value our portfolios as accurately as we can, and we've whittled the African Bank shares down to zero.
