Assumptions are the mothers of all bugger ups. Or something like that. As we were reminded today after hearing Abil had raised another R2.2bn in funding – but this time in Swiss Francs. On the surface, not the smartest idea on the planet given the strength of the Swissie and the very low likelihood that it will fall in value against the Rand – which is the currency where Abil on-lends the funds. But as Abil director Markus Borner explained in our CNBC Power Lunch interview today, nothing is ever quite what it seems. – AH
To watch this CNBC Power Lunch video click here
ALEC HOGG:  This morning on SENS African Bank announced the successful issuing of a four and a half year senior unsecured bond of 175 million Swiss Francs. Markus Borner, who is the Executive of balance sheet management at Abil, joins us. We were talking earlier with our market commentator, and saying ‘why Switzerland? It’s a place with a very strong currency’. Our speculation was well; you had no options at Abil.  You’re in such a difficult place that you had no other option. I hope you’re going to give us a strong retort to that.
MARKUS BORNER: Certainly and thank you Alec; thanks for inviting me on the program. Alec, this is the fourth of a series of Swiss bonds which we’ve issued. We’ve been active in this market since July 2012. We have a very strong following there. We issue the bonds under our European medium term note program, where we also issue Dollar bonds. Swiss bonds, as with Dollar bonds, and as we say in the SENS announcement are fully hedged back into Rand. The 175 million Swiss Francs is almost R2.2 billion, so it’s a significant amount of funding for us.
ALEC HOGG:  It’s a program, as you say, that’s been going for some years. But it seems like a lot of money for a company that now has a market cap of just R14 billion. How relevant or how necessary was it to get so much funding?
MARKUS BORNER: Okay, so maybe just to put that into context, the right point of reference is our annual funding requirements. If you look at our annual report, you’ll see that we’ve generally rolled over around 44 percent of our total funding in the upcoming 12 months. That’s been consistently been the case for about three years now. We have total funding of just over R50 billion, so let’s call it R23 billion that we roll at an annual basis. This bond represents about ten percent of that, so that’s the context in which to look at it. It’s also long dated funding – four and a half years – half a year longer than before and it basically then creates a positive asset liability mismatch. For example, our loans typically, on an average duration basis, roll up after about two years. This is long related funding, so it strengthens the balance sheet and puts in place long dated funding, which is also a focus of the regulatory Basel free changes as well, so it ticks all of those boxes.
ALEC HOGG:  Help us with the effective cost of this: it’s a five percent interest rate. You say it’s hedged back into Rands. What do you pay for hedging?
MARKUS BORNER: We don’t disclose those numbers. People are able to work it out based on the quotes that they have, or you’ll get to the conclusion that it’s slightly more expensive than equivalent Rand funding, but it’s a very important source of diversification and again, to reiterate it – long dated firm funding commitment that we have from our funders – again.
ALEC HOGG:  Markus, not everybody has access to those kinds of numbers. Just give us a guide, really. Is it 8/10/12/15  percent?
MARKUS BORNER: In terms of the hedging costs, it’s a lot lower than that, but if you look at it in terms of our five-year cost of funding then typically, that – on a Rand basis… I think we’d be sitting around – if you look at the latest issuances we had, we put an inflation link out there I think, at inflation plus 4.5 percent recently prior to the recapitalisation. That works out to about…with inflation you can read into five to six percent range, so that’s about 9/9.5 percent. This is percent or two more than that – all in.
ALEC HOGG:Â Â Markus Borner is the Executive of balance sheet management at Abil.
