Summary of Allan Gray’s Abil buy after profit warning

Last week Wednesday, on the 6th of August, African Bank released a quarterly update, which included a cautionary announcement expecting full year losses of $600m as well as the news that Leon Kirkinis Abil’s CEO for 23 years would be stepping down with immediate effect. 

A frenzy of action ensued as investors, speculators and affected parties floundered to make the most of an uncertain situation. Coronation was one such party who held 20% of Abil’s shares, it responded to the news by offloading 170 million of its 300 million shares, contributing no doubt to the plummet in Abil’s share price. 

Coronation’s watershed sale has led to the speculation that it had inside knowledge of the events that would ensue over the weekend. On Sunday the 10th of August, Reserve Bank Governor, Gill Marcus announced Abil’s bail out plan. Abil was placed under the curatorship of PwC’s Tom Winterboer, a capital injection of R10 billion was put forward as well the assurance that creditors would be protected. 

While Coronation was selling shares, Allan Gray saw the opportunity to take an option on Abil’s shares, and picked up around 30 million shares on Thursday the 7th of August as prices dropped. 

The weekend’s news was followed by the trade of Abil shares being suspended on the JSE since then the value of any holding of Abil’s shares is effectively zero. 

Both Coronation, and Allan Gray have sent communiqué’s to their shareholders, explaining the actions taken with regards to Abil’s demise. 

Alec Hogg spoke to Allan Gray’s chief investment officer, Ian Liddle, to understand the position that Allan Gray took, why it took it and the impact that it had. The key points from that interview are summarised below: 

  • Allan Gray owned less than 5% of Abil before the announcement last Wednesday, holding just under 75 million shares across portfolios. 
  • After the profit warning on Wednesday, Allan Gray purchased around 30 million Abil shares on Thursday as its share price fell. 
  • Allan Gray had successfully invested in BOE when it was in distress in 2002. Ian Liddle said that, “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 or 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.”
  • The disparity between the message from Abil on the back of its announcement and the Reserve Bank’s assessment was substantial. Abil indicated that it had taken an extra R3bn in provisions,  it also indicated that the performing book was over R40bn.  The Reserve Bank announcement however indicated that the good bank will take on net advances of only R26 billion. This leaves R17 billion of net advances which will fall into the bad bank, for which the SARB is only paying R7 billion.
  • Less than 0.3 basis points of Allan Gray’s R100 billion unit trust, the Allan Gray Balanced Fund were invested in Abil.
  • The additional amount invested in Abil on Thursday was an immaterial percentage of fund assets (less than 0.01%).
  • Allan Gray’s shareholding of Abil’s shares have been written down to zero.
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