With interest rates linked to the prime overdraft rate, JSE-listed big bank preference shares have been popular among those seeking income streams. Over the past decade, South Africa’s major banking groups used the instruments to raise billions in funding. With banks’ capital adequacy rules changing, the original role of the prefs is altering. Opening up an opportunity for financial sector activist Greg Saffy which could generate unexpected profits for pref share owners. – Alec Hogg
By Renee Bonorchis
(Bloomberg) — A South African money manager is leading a drive to form blocks of investors holding preference shares in the country’s biggest banks to persuade the lenders to redeem the securities at the highest-possible prices. 
About 22 billion rand ($1.8 billion) of the shares were issued a decade ago by banks including Standard Bank Group Ltd., Africa’s largest lender by assets, and FirstRand Ltd. mostly to expand share ownership in the country. Grouping the shareholders into voting pools will strengthen their bargaining power, said Greg Saffy, head of Johannesburg-based Cast Iron Capital, which has partnered with Exchange Sponsors Ltd. in the program.
A change in liquidity rules is prompting the banks to review the status of the preference shares, which typically have priority in the payment of dividends. The stocks, issued by the banks between 2004 and 2006, are known as non-cumulative, non- redeemable perpetual preference shares. Under Basel III regulations, they are no longer defined as core Tier-1 capital. As lenders try to boost their capital levels to meet the new benchmarks, they can buy back and cancel the shares or swap them for new instruments.
“Banks may have to do buybacks or replacements, but we’re going to lobby the banks for those shares,” Saffy said in an interview. By setting up the voting pool, Cast Iron Capital and Exchange Sponsors, an investment adviser, will form a market place where the shares can be traded, with the two firms earning performance fees for transactions, he said.
Framework Needed
FirstRand is waiting for the central bank to publish “the final resolution recovery framework” before discussing its stance on the redemption of these preference shares, Sam Moss, a spokeswoman, said in an e-mail Monday. Investec Ltd., Nedbank Group Ltd., Standard Bank and Barclays Africa Group Ltd. weren’t immediately able to answer questions about the shares.
The South African Reserve Bank has been issuing capital framework guidelines for the lenders so as to ensure their compliance with Basel III rules.
Investors are able to start organizing themselves into the voting groups Monday, by visiting a website that Saffy and Exchange Sponsors have set up, or by calling the firms.
Six preference-share instruments from lenders including Investec, Nedbank and Barclays Africa are being targeted. Pooling the investors will enable them to negotiate with the banks for a cash payout at “an acceptable level,” Saffy said on the website.
“We’ve canvassed some of the institutional investors and there is keen interest and support for our initiative,” Saffy said. “We are in the process of collecting the votes from all holders and custodians of the instruments.”
