Abil BEE shareholders biggest losers
By Riaz Gardee*
The Government Employees Pension Fund (PIC) and BEE shareholders are amongst the largest losers in the recent collapse of micro-lender African Bank. The PIC has a beneficial shareholding of 15.3% and Abil's BEE shareholders hold c. 5% through its empowerment vehicles Eyomhlaba and Hlumisa. This beneficial ownership of over 20% and the unsecured lending political constituency probably played a role in the Reserve Bank's intervention as the bank has no real depositor base. The other significant shareholder is Coronation Asset Management who holds c.22%.
BEE Schemes
Abil initiated two BEE schemes, Eyomhlaba and Hlumisa, with the initial aim of achieving 10% BEE shareholding by 2015 when they would convert to Abil shares and be freely tradable:
- Eyomhlaba was formed in 2005 as Abil's 1st BEE scheme currently holding 3.24% of its equity across roughly 5 000 shareholders; and
- Hlumisa was formed in 2008 to counter the dilution effects on its BEE shareholding after Abil issued shares at R31 to make the fateful purchase of Ellerines for R9.1bn. Hlumisa currently owns 1.73% in Abil and is held by approximately 8 000 shareholders.
The total BEE shareholding is thus c. 5%.
BEE shareholders in the past have largely been shielded from capital loss through the structuring of the transaction and favourable movement of the underlying share price. A combination of leverage and a falling share price is not for the faint-hearted. African Bank's share price has collapsed from R40 in 2012 to 30c recently wiping out over R40bn in market value over this period.
Share Trading Suspended
Trading of Abil shares on the JSE and Eyomhlaba and Hlumisa shares on the OTC markets has been suspended from the 11th of August as the South African Reserve Bank stepped in to stave off a financial contagion. An ominous message on the OTC platform where the now suspended BEE shares once traded reads 'In an investment in equities, unfortunately there is no guarantee that any investor will be able to receive their invested capital as shareholders' capital is at risk. It is possible that shareholders will not receive any of the capital that they have invested.' An apt assessment of the precarious position all Abil shareholders face.
BEE shares are inextricably linked to the performance of the underlying investment and the total collapse of the Abil price from R40 in 2012 to 30c recently has been mirrored by the BEE shares. Eyomhlaba shares were trading over R25 at one stage and now recent bids were at 20c. The following graph depicts the Eyomhlaba share price performance over the last 6 months:
Furthermore both Eyomhlaba and Hlumisa have preference shares outstanding of R112m and R65m respectively which translates to R2.70 per share for Eyomhlaba and R2 for Hlumisa. This is the debt outstanding before they can participate in any share appreciation. Hence the market value of Abil should exceed R4bn for Eyomhlaba and R3bn for Hlumisa before they can see any value. The latest market capitalisation before suspension was c. R450m or 30 cents per share.
Rise and fall of an icon
Micro-lending in South Africa has a negative perception and it seems like the hunter has now become the hunted. Abil, once the darling of the micro-lending industry, led by seasoned financier Mr Leon Kirkinis could do no wrong. Over the last 23 years he built up a market-leading financial services player in the micro-lending segment which none of the big 4 banks could apparently fully understand nor dominate. Abil had no depositor base so used long-term investor funding instead. Its 3.2m customers and loan book of R50bn were at one time the envy of rivals.
The shareholder register boasts the 'who's who of smart money' including Coronation, PIC, Old Mutual, Allan Gray, Sanlam, International Finance Corporation (US), Stanlib and directors including Mr Kirkinis. His shares were worth almost R500m at the peak price. Abil had seasoned management with vested interests who had been through previous recessions including the cataclysmic 2008 crisis. They were the dominant player in the market with bespoke systems for an established customer base and branch footprint. Their return on equity and profits were positive for many years. Most analysts, including the international banks, were rating their darling share a buy when it dropped to R30 sometime in 2013. But then it all suddenly went wrong?
It started by reporting losses last year as a result of 'higher provisions' then requiring a R5.5bn rights issue. Recently a R6.4bn loss for the 2014 year was forecast together with a requirement for an additional capital requirement of R8.5bn. The Ellerines business purchased for R9bn has now also been placed into business rescue. Management was unable to respond to changes in the market and business climate. This could be a result of cognitive delusion driving optimism and the inability to sever the cancerous Ellerines business. Bankers don't seem to make good furniture salesman or vice versa.
The Reserve Bank has allowed management time to compile a detailed plan but in essence the business has been split into a 'good' bank and a 'bad' bank. The Reserve Bank will purchase the 'bad' bank's book of R17bn for R7bn. The business will retain the remaining 'good' book of R26bn. New capital of R10bn will be underwritten by SA's large bankers. Senior debt providers will only have to take haircut of 10% on their R40bn debt. So that's roughly remaining debt of R36bn and loans and equity of R36bn not leaving any equity for existing shareholders. It seems the emperor had no clothes after all.
* Riaz Gardee is a Chartered accountant who specialised in mergers & acquisitions and corporate advisory for a number of years. In recent years he has been working on expansion and development of businesses in sub-Saharan Africa.