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Such is the credibility of Futuregrowth’s chief investment officer Andrew Canter that his firm’s decision to stop lending money to six South African State Owned Enterprises knocked the value of the Rand and raised the national cost of borrowing. He explains the rationale in this powerful interview, hitting out at criticism that he is acting for “white monopoly capital trying to effect regime change”. Cantor admits he should have acted sooner, but says there are now compelling reasons for the Futuregrowth lead to be followed by other South African money managers. We expect there to be similar announcements from other financial institutions before the weekend, confirming an investment strike in the wake of President Jacob Zuma’s attacks on Finance Minister Pravin Gordhan. – Alec Hogg
On the line from Cape Town now is Andrew Canter, the Chief Investment Officer of Futuregrowth who dropped a bit of a bomb today with the announcement that Futuregrowth will no longer lend to six South African State Owned Enterprises. Andrew, this is pretty unprecedented as far as we know – is it something you’ve ever done before?
It’s not unusual for lenders to pull lines from various borrowers for various reasons at various times. To do so with the SOE’s is extraordinary, but then I think we’re living in an extraordinary moment, it demands a different set of questions that we’re used to asking.
Today you cancelled R1.8bn in investments into SOEs – sounds like a lot of money, in terms of your portfolio, is it?
We manage about R170bn in total, about R150bn of that is probably domestic fixed interest. We are big funders to the SOE’s and in addition to what we already have as exposure; R1.8bn is a big number so yes, it’s enough to get our attention.
Which state owned enterprises are not going to be getting the funds that you intended giving them?
I think the important question there is why did we choose the big six and that is who we’ve identified as the first wave, if you will, is the IDC, the Land Bank, the Development Bank of South Africa, all three of those being state-owned lending entities, the other three being SANRAL (the South African National Roads Agency), Transnet and Eskom, those being more industrial or developmental and that does not state all the SOE’s but these are the SOE’s that we do see and have seen in the capital markets funding capital market instruments and money market instruments in scale and continue to see.
For example we haven’t put SAA on the list, we have no exposure to SAA and frankly we’re not going to start looking at SAA given what we know about them at the moment, it’s not even a question.
These are the entities where we have big exposure, we’re looking at new loans, they are looking for capital as we speak and so we need to get to a process pretty quickly to know whether they’re credit worthy borrowers in the long run.
When you said that you wouldn’t be giving any money to SAA, what’s the reason for that?
What I said is we’re not even going to bother looking at SAA, given the machinations we read in the press. We’re not even doing any analysis. What we know about the financial statements, the financial status of SAA and the political machinations that appear to be swirling around SAA, I don’t have the time in my life to spend on wasting time, so we’re just simply not going to be in that game. I’m thinking about credible state-owned entities that are probably creditworthy on a standard loan basis, but what we’re really worried about is their long-term sustainability in what is looking like a very politically interfering environment potentially.
Denel is also not on the six you’ve listed as no longer receiving any money from Futuregrowth – a similar perspective to SAA?
Yes, I think the secondary SOE’s like Denel or ACSA could easily be companies that we’ll review in the near term, but on the other hand are not borrowing from us at the moment and we had to narrow our scope. As we get further down the list and know which questions that we need to ask and what answers we’re going to be looking for, because this is a journey for us and for all asset managers I think, we’ll get to the rest of those later and by the way, those entities you’ve named or that I’ve named are not in the capital markets looking for money right now, so it’s not important to make that statement right now.
I want to go down an important side road and that is we’re not making a statement at all about the creditworthiness that these companies take. All of these entities, we are actively exposed to, we have been lending to until very recently and they have good credits now, they have strong balance sheets, they have strong managements, they have credible business models, all of them. They have state support where necessary, say in the case of Eskom, so it’s fine, it’s not a credit today, it’s a loan you talk about for five or ten years and if you think about a lending entity, Land Bank for example, if Land Bank is a lending entity and it becomes subject to political interference in the lending processes then suddenly Land Bank on a five-year review is making bad loans to friends of friends, the loans are going to go to rot, the capital base is going to be eroded, they will be downgraded and become a bad credit on a five-year review.
What we’re saying today is before we make any more loans we need to understand the governance of these entities, the independence of these entities, the decision-making processes of these entities to ensure that we’re helping build this, helping themselves build their sustainability for the long run, that’s what we’re saying. This is not a panic, this is not “Oh my gosh, they’re all going to go bust”, we just are not there. These are really credible companies with a good developmental mandate for the nation.
There have been a lot of machinations around these companies now for some time, particularly Eskom. Why today?
Good question and all of us, as citizens and taxpayers in South Africa for the last several years but notably since December, are very conscious of what’s been going on in government and what they may or may not do in the centre and what has been emerging as battles between departments, (which had gone off the boil for quite a while) and then suddenly a week ago roughly the new charges against Pravin Gordhan, which may or may not be true. I’m an estimator, not a lawyer. I read the legal reports, but it looks like in-fighting inside the government, that’s alarm bell number one. It sets everybody’s hackles up and gets us worried, it’s just uncertainty, we don’t know how to interpret political behaviour, we don’t know who is right or wrong, and it’s a lot of swirl and rumour.
Then the second issue and this is probably the bigger button for us, is the president announced a new council, (whatever a council is) to oversee, (whatever oversee means), the SOE’s and we think to ourselves, what does that mean and give me some context “and there is no context”. The only context is some asset we shouldn’t worry about. Well, that’s not a context, that’s not an answer and it could be everything from a money grab with nefarious purposes to get control of companies, a balance sheet and income statements in a bad way or it could be actually a good-hearted attempt by central government, the administration to improve efficiency, to improve the mandates of these critical developmental agencies, we don’t know and in an environment of we don’t know, we don’t lend money and that’s good investment practice right. If the circumstances change, as they did a week ago you change your investment view. That’s what we’re doing.
How much of the R170bn you have under management is in fact lent to state-owned enterprises?
In aggregate, (I don’t know the number), it’s something on the order of probably R8bn in total. If you count municipalities and such, it could be as high as R9bn or R10bn.
That’s a sizeable amount of money…
Yes it is and look, there may be allegations that “Oh well, our Futuregrowth is talking its books, so they can blah, blah, blah”. Believe me if other asset managers follow us and funding dries up in the short-term for these SOE’s aside from it being a tragedy by the way and a terrible thing, but if it happened to widen, future portfolios and indeed our clients will suffer in the short-term. We just believe that it is an appropriate credit decision, looking back from five years forward I’m going to have to answer to clients for why we advanced the extra R1bn, R2bn, or R3bn in this environment at this time and we couldn’t bring our minds to do that.
It reminds me a little of what you did with African Bank where you also issued a warning; nobody followed you immediately but later wished they had.
Well I think it’s a bit different. The Abil warning, you’re right nobody wanted to follow but you know there were people with different bona fide, good, sound investment views of why Futuregrowth could have been wrong. We had a moral view, which turned out tragically to have been right in our suspicion, but I think there was a credible argument for why we could have easily been wrong again. Management could have changed the direction of that ship. I think in this case it’s less contentious.
I would think any investment management firm in South Africa making loans to SOE’s and let’s be clear, it’s not just us. All the asset managers have some exposure. They must be sitting in the same committees, having the same thought processes Futuregrowth have and I would imagine that come tomorrow when we engage with them through the ASISA committee and we try to come up with a common list of concerns and a common list of questions we can send to these SOE’s that there won’t be a big fight about it. We all need information, we probably all need the same information, so please let’s not write 15 letters to Land Bank, let’s write one letter to Land Bank, let’s get one set of answers from them so that we can all assess that information and make Land Bank’s journey through this difficult period easier and I use Land Bank as an example, but it applies to the IDC and DBSA and the other three.
What kind of reaction have you had from your counterparts in the industry?
I haven’t spoken to them yet because we considered, and one of the reasons we went public with this was because we realised it was substantial until it was constituted material as public information, it could affect prices of these bonds. I have to admit I didn’t anticipate the Rand doing what it did today or the RSA rates doing what they did today. We didn’t contemplate that. I didn’t think it was that big a deal, but we did contemplate that spreads on the SOE bonds would widen, therefore we decided that we were going to have to make some sort of public statement if we had material on our public information. We haven’t spoken to them is the headline.
If other AMs do not follow FGrowth could be out in the cold and this could simply be a damp squib. PIC has >R1trn https://t.co/fQcFVbh5zX
— Craig Gradidge (@gradidgec) August 31, 2016
It has been a fairly dramatic move. The Rand, which has in the last week gone from R13.30 to around R14.70, weakened further today, the bond rates went up higher again – clearly you considered all of this, but did you consider that it could have as big an impact?
No and it saddens me. To even have contemplated having to make such a statement knowing that it would increase the cost of capital for developmental finance institutions that are supposed to be and are working for the development of the nation and that we knew that, or could surmise that we were going to increase their cost of capital really saddens me and the market’s reaction saddens me. It’s not my goal to punish this country, it’s certainly not.
Pravin Gordhan, the Finance Minister says that the Treasury, and he personally, are paying the price for the zealous work that the Department of Finance has been doing in trying to get to the bottom or trying to restrict crony capitalism within the state-owned enterprises. Is that something that resonates with you?
Resonates is an interesting word. Again, we’ve all been watching this, the news flow, the stories of procurement gone awry, of oil reserves being sold, we’ve tried to get to the bottom of the oil market, of the push for nuclear power against what appears to us, from our view of the power sector to be a bit of the illogic, of whatever all the other machinations that are going on including these charges against Pravin Gordhan, which again I have no insight into whether they’re right or wrong because I’m not a lawyer, but the timing certainly looks suspicious. Does it resonate with me? Yes it probably does, but it’s not my place and I’m not a politician and the game of politics, which creates perceptions and both sides have to occur to create their perceptions.
People like you and I sadly are outside so we really don’t know what reality is, so we must be cautious not to act on that false reality, we must act on information we have or don’t have. It’s already, that’s a rescale, they may be at risk of some sort of capture by nefarious actors, or they may not. Our job as lenders and I think this is quite a critical point, if we do our job right with our industry, we will improve the governance and the independence of the state-owned entities. That may sound like a bold political statement, it is not, and it is the role of lenders to do that.
What do lenders do in the world in the normal course of events? We make loans to people we’ve got covenants, conditions, warrantees and securities so that they can’t go out and borrow too much money, they can’t over gear, they can’t take on, do risks. Lenders act always as checks on borrowers, that’s what we do. We keep shareholders and managers from going wild. If we do that for state-owned enterprises and improve the governance reporting around the state-owned enterprises, we will have done a service both for them and for the country, that would be my greatest aspiration.
However, lenders sometimes do in very unusual circumstances try to effect change. If we go back to 1985 after the Rubicon speech, Willard C Butcher to Chase Manhattan Bank did exactly that when he pulled, or started the withdrawal of lending to South Africa, and we know the consequences, the debt stand still, the interest rates going up and of course change that occurred. Are you thinking along similar kind of lines here?
Not really. I just don’t think it’s our job to try to affect political change with pension fund money. It’s our job to protect the pension fund money as a core proposition and that means good lending and good credit practices and that’s what I’m talking about. As I say, whatever this government does, if it creates uncertainty, fear, and higher risk for lenders, its cost of capital is going up. I am merely a cog in that machine and sadly what we had decided to do today is increasing the cost of the capital for the country apparently as we see the Rand going down, rates go up and also for these entities and I tell you, I promise you if we get through this review process and we can sit here in three weeks’ time and we say “Look, we’ve done a deep due diligence of the governance of the IDC and we are satisfied with its independence and its procedures” and I will do that publicly in fairness.
When African Bank weren’t able to satisfy you that they had changed their ways, what would it take for those six state-owned enterprises to convince you to in fact do or start lending to them again?
It’s hard because you’re talking about six entities with six different businesses, so let’s just say that there’s not a single list, but what they are saying is, as lenders that we commonly would look out for with any entity we’re going to lend money to, you’re going to look at how their board is structured, how many independent non-executive directors there are, what committee those non-execs sit on, what’s the turnover of those non-execs. For example, I’m going to look for, if I see a turnover on an audit committee by a non-exec chartered accountant who is on that committee and the turnover there is every two years, it’s going to set off an alarm bell.
If I see a financial director turnover every two years it’s a clear alarm bell from a credit point of view, it’s just telling you that somebody who is a chartered accountant has a standard to live up to and a professional credential to support doesn’t want to stick around, so this is the kind of thing and then first of all that’s the kind of stuff that we’re going to look for. We’re going to look closely at the board compositions, we’re going to ask about their policies and terms of PEP’s, Politically Exposed Persons, then we’re going to get further down and look at it and say in the case of lending entities, IDC, Land Bank and DDSA, who is on the credit committee, what’s the mandate of the credit committee, how many independent non-executives are there, how do they deal with large sized loans or connected loans?
We may actually, if we’re sitting here in a few months’ time doing a bilateral loan and say “Well lend me R1bn to the mandate”, we may say that as a requirement to that we want to see any loans granted in excess of R5mn. It could be reporter requirement under loan agreement. That would also not be unusual necessarily. Each entity we have to approach individually, but it’s all about assessing the voracity of their governance and the independence of their governance. Obviously in the current environment we’re going to look to what their reporting lines are.
For example as we said today, the Land Bank I think reports to National Treasury still, which happened several years ago and so that’s probably a good and robust reporting line, assuming National Treasury maintains its current status, whereas other state-owned entities report to different ministries. IDC reports to the Ministry of Economic Development, while maybe its agenda is less financial and more developmental and therefore his acumen for credit decision-making is not as good as somebody who comes from a financial background. I don’t know that. If you understand I’m giving you a for instance, not an assertion. These are the questions we’ll be looking at and asking.
In 2014 the new Minister of Public Enterprises made wholesale changes and appointed some rather strange people as directors, including a director of the Gupta Enterprises onto the board of Eskom. This has been in the public domain, that kind of action for a while, the timing coming today.
A couple of things, we stopped lending particularly to Eskom, we were only buying and the market was only buying the government guaranteed bonds and that was a loan to Eskom at that time, you could kind of get away with the simplistic argument that you were buying government credit. I think what you’ve said is true and I think my shameful answer is that perhaps we should have listened then and paid more attention then, so mea culpa.
The Zuma Camp is playing this down, saying “Well, this is just Andrew being Andrew, being dramatic”, how would you respond to that?
I suppose it goes to my motives and intentions and whether I’m playing angel to the market and I’ve just demonstrated that I’m not. I don’t have to answer that charge really. This goes to the minds of the asset managers, the pension funds, the consultants that service those pension funds and whether they think we’re on the right track. The feedback I have had so far is very positive from all those people. I believe come tomorrow when we’re speaking to our compatriots, there will be strong and unified support, the realisation that we’re all in the same boat with the lack of information, and we need information and make intelligent investment decisions that we can stand behind and be accountable for it.
Are you expecting then that others from your industry will follow you?
I would hope that they find their own words and it’s not a matter of agreeing or disagreeing with Futuregrowth, but they come to their own realisation and we all get together and have a cup of coffee and make the right list of people to ask questions and what questions to ask but yes, I do expect that.
The Zuma Camp again is also saying they doubt there will be a general strike on investment by the financial sector…
I’m trying desperately hard to stay out of the political realm here. I am going to admit; I do not know or understand the machinations of this government or the party is on the sides of the various debates. I don’t know who the Zuma Camp is and so people must say what they must say. I think I saw one tweet where I was accused of being a racist show of the National Treasury today. I am not a racist show for the National Treasury, I’m a credit guy making loans with people’s pension funds and I want to be proud of what we do and be able to be accountable for what we do, it’s almost as simple as that.
Is this action aligned with your overall purpose at Futuregrowth?
It’s really interesting you say that because as we contemplated this decision on Monday night because these decisions are very recent and I sat there at my desk and thought about it, I went back to Futuregrowth’s one-page written purpose statement that we kind of buy into it, it says right there, “Yes, we want to play a positive role in society living and”, separate line, “We want to be proud of what we do”, so it does very much hark back to our purpose at Futuregrowth.
Some critics are saying this is “white monopoly capital trying to effect regime change”.
Yes, that’s the racist arguments. Apparently in South Africa today if you just lose somebody and that somebody happens to be a different skin tone, black or white, you’re a racist. You know, it’s actually a lot of bullshit frankly. We’re making decisions; we’re having dialogues with a range of people, white, black, and otherwise. My team is not all white, I’m a white guy, so what. You know this was a unanimous decision by a very racially diverse group of investment professionals applying their minds. If somebody doesn’t like it, they want to wave the racist card, I think they’re just being children, they must stop it now, they’re damaging the country.
Internationally have you had any feedback?
The story went out on Bloomberg and in fact, I did a video on Bloomberg tonight. I would imagine there will be feedback because the international market reaction was there. You could see the Rand fell off after this went on to Bloomberg and after I did the TV it went off. I had not contemplated, frankly that anybody read what Futuregrowth would have to say in the international markets, but evidently they do. I don’t generally speak to that constituency.
Andrew Canter is the Chief Investment Officer at Futuregrowth.
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