At 4 o’clock yesterday afternoon, I did a lot of this:

And in case you missed Thursday’s post, here it is: And I give you…African Bank.

A brief background:

1. African Bank gave out a profit warning on Wednesday, as well as announcing the need for a new R8.6 billion capital raising and the resignation of their CEO.
2. Their share price went into freefall.
3. No but seriously:
4. 
5. This was greatly encouraged by certain investors from the sidelines. In particular:
   1. Dan Matjila, the Chief Investment Officer at the Public Investment Corporation: We have really been spending a lot of money on this company, it’s almost like a bottomless pit now and we need to find a way of closing it.*
      *Good LORD, man! You do realise that the PIC owns 15% of African Bank?
   2. 36ONE Asset Management’s Jean Pierre Verster, who has had an enormous amount to say, actually, but in particular: I still say that [the share price] is going to zero.*
      *Full disclosure: 36ONE has seriously shorted ABIL shares, with a clear vested interest in the share price going as low as possible.
6. By the time the shares had dropped to 31 cents on Friday evening, the shares were effectively trading at 4 cents for every R1 of book value. Even if you take the R7.6 billion loss into account, you had the shares trading at 9 cents for every R1 of adjusted book value. Those are real doom-and-gloom liquidation scenarios.
7. There was also much Let this go to the wall – what systemic risk is there in African Bank really?
8. But my view was: there would definitely be a bailout. It was just a question of time.

So what has the SARB done?

Governor Gill Marcus gave a speech yesterday (you can read it here), where she announced some support measures. They are as follows:

1. African Bank will be split in two. Or, actually, three – based on my reading of the announcement.
2. Bank 1 will be the “good bank”. It will take all the good performing loans from African Bank’s loan book (about R26 billion). The deposit-holders will also be moved into the good bank at full value. And the bondholders (other than the subordinated bondholders) will move across to the good bank at 90% of their original face value. Bank 1 will buy all the insurance entities in the ABIL group, and will eventually relist on the JSE.
3. Bank 2 will be the “bad bank”. It will belong to the SARB. It will hold all the bad loans from African Bank’s loan book (about R17 billion). The SARB will pay the good bank about R7 billion for these bad loans. The SARB will continue to collect on these loans – and if they recover more than R7 billion, then they’ll have to pay over the excess to the good bank.
4. All the remaining liabilities will remain in the old African Bank (which I am calling Bank 3).
5. There is also going to be a capital raising for African Good Bank (Bank 1): a R10 billion capital raising that is being underwritten by almost everyone (hurrah!). Which means that African Good Bank will definitely get R10 billion in capital – some/most of it will come from current shareholders, and the rest will come from the new shareholders (being the underwriters).
6. Ellerines is gone. Basically.
7. Oh, and importantly: African Bank is now under curatorship. Which means that trading in all its securities (debt, equity, and otherwise) is now suspended.

Obviously, this sparked a lot of commentary on Twitter, much of which was ridiculously low on fact and high on the rhetoric. Mostly two camps:

1. Team “How Appalling” – who can’t believe there is a bailout; and
2. Team “Downfall Gloating” – who have always known that the unsecured lending bubble would burst, and it serves all those shareholders right to leave with nothing because they’ve taken advantage of all those poor borrowers with abominably high interest rates and ha ha, biatches!

And because I’ve actually read the press release, I’m going to respond to those two camps as follows:

Dear Team Appalled

Stop worrying about taxpayer money. It’s not taxpayer money. The government is in DEFICIT, and thus, the money being used is money that has been BORROWED FROM INVESTORS. In all likelihood, some of those same investors that have lost money in all this. Sure – the government may eventually pay back those borrowers out of taxpayer funds – but that’s far in the future, and probably mitigated by the fact that:

The SARB has bought a R17 billion loan book for R7 billion. Okay – so it’s not performing so well right now. But they can get debt collectors in, and garnishee orders. And now that the strikes are over – we can expect a number of those loans to start performing again, is my general feeling.

So the SARB is unlikely to lose any money. And if they do lose any, it’s not going to be taxpayer money for many many years yet. 

Please relax.

As for your systemic risk arguments – let me just say that contagion is not rational. It just isn’t. That’s why it’s such a problem. So asking “Where’s the systemic risk in African Bank?” is entirely missing the point, because the systemic risk is attached to the terms “bank” and “collapse” and general public opinion.

And while we’re at it:

Dear the gloaters

I think you’re right – there was an unsecured lending bubble. And yes, it was vulnerable to being popped by almost anything that hit the lower class. Well called.

However, “abominably high interest rates”?

No no. Those are better interest rates than what the poor are able to get from loan sharks – which is all that was available to them prior to this. Yes those rates are still high – but the risk is high, and the administrative overhead is often the same whether you’re giving out a loan for R5,000 or a loan for R100,000 (so they’re high cost to make available). 

Are you saying that you’d prefer to shut the poor out of the credit markets? Because, what, they don’t have the ability to know what’s good for them and they need to be protected from themselves because they’ll spend that credit on alcohol and wastefulness and whores instead of using it productively?

You do realise that’s an extraordinarily prejudiced view, right? As bad as believing that women cause their own rapes by dressing in mini-skirts? 

I’m just saying. 

Either way, the SARB and the Minister of Finance disagree with you. They want African Bank to remain open for business – which does seem to suggest that they’re okay with letting the unsecured lending continue. Albeit under curatorship.

And finally, to come back to your the-shareholders-had-it-coming, I don’t think that the shareholders have lost here. At all.

Why This Is Great News For Shareholders

And why I gave a little happy dance…

The artist formerly known as African Bank will now be three entities:

1. A Good Bank (with the good performing loans)
2. A Bad Bank (with the bad loans)
3. An Old Bank (with whatever is left of African Bank, including the interest in Ellerines) – at least, so I gather.

As I read it, here are all the ways that the new shareholders will benefit:

1. They can take up the rights offer in the Good Bank, which is ring-fenced from the bad loans (now in the Bad Bank) and Ellerines (in the Old Bank). So their money will be pretty safe. And they’ll get the upside when the Good Bank eventually re-lists.
2. That upside could be significant – because all the stuff that was concerning about the Old Bank (Ellerines, the business model, the non-performing loans) will now be a problem of the past. The Good Bank is going to be all about performing loans and so forth.
3. As for the bad loans – there’s a guaranteed R7 billion for anyone that takes up shares in the Good Bank (I think that’s where the R7 billion will go). And if there is better collection (including interest rates), then that will be passed along. So there’s upside there.
4. The bondholders are taking some of the hit (specifically, 10% of their face value) – so there’s a win.
5. And once the Old Bank is wound up, there will possibly be some residual payout. After all, Ellerines needs to be sold off. And the New Bank will buy the insurance units. But who knows – perhaps there really won’t be anything left.

In summary, if you managed to buy shares on Thursday and Friday, then you’re probably in for a little windfall. If you take up the rights offer, then you’ll have:

1. Shares in a good bank, with none of the really bad risks (and your share purchase was really just paying for the right to participate in the rights offer).
2. Possibly a bonus payout from the bad bank.
3. And even if you don’t do the rights offer, hopefully a little payout from the old bank.

It’s good news. Especially if you’re a new shareholder.

And if you’re an old shareholder, then at least you’re protecting your future investment from the bad investment.

You know why I like the SARB plan?

Because I think that everyone has lost a bit, but everyone could win in the end.

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.