Now that everyone has had a week to get used to the fact that African Bank is no longer freely trading on the JSE, people are beginning to speculate on the value of the new “good” bank and the dismal-ness of the bad bank and the structure of the restructuring (we’re all still in the dark, mostly).

But over the weekend, this article amused me “36One’s JP Verster: Why Abil Shares are worth zero.”

Which does run sort of contrary to this statement that JP made to Bloomberg:

“We’d be happy to buy current ordinary shares over the counter at 5 cents — they’re not worth zero.”

But, like, hey. You’re allowed to change your mind.

So here’s what really impressed me: while everyone keeps talking about the tidy R100 million profit that 36One made for their investors, their short trade was still open at 31 cents when trading was suspended. Jean-Pierre says that he’s delighted to be in this position (or, rather, that 36One is delighted).

So at first, I thought I’d be a little nervous if I were him. I’m not that familiar with SA’s short-selling rules, but I’d say that’s an awkward position to be in. If those shares get recalled by the share-lenders, then how will he deliver? Sure – they can continuing paying carry (ie. rental) on the borrowed shares in the interim – but that’s always assuming that the lender doesn’t want to take the shares back.

If those shares were recalled, then 36One would probably have to go and buy those shares over the counter (OTC).

So Let’s Talk About the OTC Market for ABIL Shares

The OTC market for ABIL is not doing too badly. How it works:

1. Not all shares have to trade on an exchange.
2. For example, you and I could agree to sell shares between us privately. That’s how it works for private companies, after all. There would just be some administration issues around changing the company records, etc.
3. Fortunately, because those Wall Street kids are so clever about those things, there are whole OTC markets for trading shares privately.
4. Especially when it comes to the trading of shares in non-US banks on US markets.
5. African Bank was no exception (it definitely wanted to have access to US equity markets).
6. So African Bank has a Level 1 ADR (American Depository Receipt) that trades over the counter. Each ADR represents a block of 5 shares.

Now trading may have been suspended on the JSE – but it certainly hasn’t stopped on the US OTC market. Here’s a graph:

On Friday, trading closed at $1.25 for the African Bank ADR (so an effective trade of $0.25 per share, or about R2.59).

To me, that is quite clearly saying that:

1. The market agrees that the share itself is probably worth close to nothing (look at what happened over that fateful Thursday and Friday).
2. But
3. When the market realised that there would be the option to participate in a good bank, they thought that the share was worth something.
4. And by something, I mean that “the option to participate in a good bank”.

So to say that ABIL shares have zero value seems a bit crazy to me. If they were worth zero, then you would be ambivalent about having the share and not having the share. Let me ask you this:

1. Would you rather have the option to participate in something that might be worth something?
2. Or would you rather have nothing?

Clearly, it’s better to have something rather than nothing. The option is something. Ergo: the share cannot be worth zero.

In fact, according to the OTC market, that option is currently worth around R2.59. Although I agree with Mr Verster – I think we can all expect that option value to change when we get a clearer picture of what the actual restructuring will be.

However

The OTC market is only an indication at this point.

There are no new ADRs being issued (you’d create an ADR by depositing your shares into Bank of New York Mellon’s account with its SA counterpart, and getting an ADR to trade in New York – but Bank of New York Mellon has now closed its ADR book for African Bank). You can still trade the existing ADRs – but you can’t take your ABIL shares in SA and go and sell them in the US.

And regardless, South Africa’s Financial Services Board prevents fund managers from trading over the counter (and the share lenders are almost certainly big funds). So there’d really be no benefit to them at this point in recalling the shares – why spite themselves when they could still be earning carry charges off 36One?

So 36One needn’t worry, I’d say. Unless someone gets spiteful.

And As For The Value Of Shares In The Good Bank

Another JP quote:

We’ve taken the view that there’s very little value in the good bank. On our analysis the new bank will have 36 billion rand in liabilities and 26 billion rand in assets. That hole will be hard to fill.

So basically, the good loan book of R26 billion, and 90% of the secured bonds (R36 billion).

To which I’d be saying: “Are you mad?”

If R36 billion worth of liabilities move across to the new bank, then R36 billion worth of assets would go with (including the good book and cash). There is no “hole to fill”. That hole will have to move across filled. Because why would the good bank take on R36 billion of liability without the corresponding assets? And let’s remember that African Bank is not insolvent!

However the restructuring ends up matching the good assets with the liabilities in the good bank, I don’t believe that the SARB would allow the good bank to begin its life as factually insolvent prior to the capital raising. In fact, I’m pretty sure that’d be illegal. And certainly, it would open itself up (alongside the corporate finance houses) to much suing should the whole thing not work out.

I’d pretty much say that, at a minimum, you’re looking at a good bank that will have assets of R36 billion and liabilities of R36 billion. Then there will be the capital raising, leaving you with:

1. R46 billion in assets, financed by
2. R10 billion in equity, and
3. R36 billion in liabilities

Then some of that capital raising will be spent on buying the remaining assets out of the old bank.

What that means for the shareholdings in the old bank/bad bank – I’m not sure. As I said last week, there could be value left. But there are so many variables at play (like the fact that the old bank will still have a R17 billion loan book that’s been “sold” for R7 billion with clawback provisions – and that R17 billion value is already after impairment charges!). The process could take a while – but my bet is that you’ll still see something trickling through in the next few years.

Either way – at this point, it is all speculation. We don’t really know what the financial position of African Bank was when trading was suspended. We certainly don’t know the details of the restructuring – just some broad ideas of what they’re aiming for. And in that ambiguity, there is room for upside.

Which is why that OTC price is no longer sitting at 31 rand cents.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.