UPDATE 1-South Africa's Abil tumbles after Moody's cuts to "junk" rating

Fri May 30, 2014 12:16pm EDT

* Moody's cuts struggling lender to speculative grade

* Investors concerned about another rights offering

* Shares down by a third this month (Adds details, quotes and background)

By David Dolan and Mfuneko Toyana

JOHANNESBURG, May 30 (Reuters) - Credit agency Moody's cut its international rating on South Africa's African Bank Investments to below investment grade, or "junk", citing concerns about spiralling bad loans and sending its shares down nearly 7 percent.

Abil, as the bank is known, has been hammered as its target market of low-income borrowers have been squeezed by inflation, high levels of indebtedness and labour strife in the platinum mines, forcing many to default on payments.

Abil makes most of its money from unsecured, higher risk, high-interest loans that are not backed by collateral.

The bank has traditionally funded itself in the debt markets, which means a credit downgrade could drive up the cost of its international borrowing.

"With this downgrade, we think they could now have some challenges on the funding side. If you combine challenges on the asset side of your balance sheet with challenges on the liabilities side ... that is quite a precarious position to be in," said Jean Pierre Verster, a fund manager at 36One Asset Management.

But Abil Chief Executive Leon Kirkinis said the downgrade would not dramatically affect funding costs.

"The overall cost of funding for the bank will not change significantly, just because new funding over the next few months will be slightly more expensive," he said in a statement, adding the bank had "multiple options across many diverse markets" for funding.

He also said the bank was "extremely cash generative internally at the moment".

Last year Abil raised 5.5 billion rand through a rights offer, and investors said they were worried it might need to raise more capital.

"That's one I wouldn't touch with a barge pole," said Ron Klipin, a portfolio manager at money management firm Cratos Wealth, referring to Abil shares.

"Customers are under more pressure. Maybe they are going to have to have another rights issue."

Earlier this month, the bank reported a first-half loss of 3.1 billion rand ($298 million) and said it would not pay a dividend as non-performing loans totalled 600 million rand more than expected.

DETERIORATION

Moody's cut Abil's global senior debt and deposit ratings by one notch to "Ba1/Not Prime," the bank said in a statement on Friday.

Moody's also cut its national ratings by one notch to "A3.za/P-2/za," which is still investment grade.

"This rating action reflects Moody's assessment of the deterioration in African Bank's asset quality," Abil said.

Moody's also placed the long-term ratings on review and is likely to conclude that review following the release of a nine-month trading update later this year, Abil said.

Abil shares ended down 6.8 percent at 8.40 rand.

The stock market appeared to be pricing in the potential for another rights offering. The shares have fallen by a third this month, making Abil the worst performer in May on the 165-member All-Share index. They have lost 70 percent over the past two years.

"I do think there is a high probability of another rights issue being needed," said Verster at 36One Asset Management, which has a short position - a bet that the shares will lose value - on Abil.

Abil's total debt is nearly six times its shareholder equity, according to Thomson Reuters data, the highest among South Africa's eight biggest listed banks.

Its operating margin, a measure of profitability, averaged just 15.2 percent over the last five years, well below the industry average of 26 percent.

Its outstanding foreign currency bonds totalled $1.6 billion, according to Reuters data. ($1 = 10.4145 South African Rand) (Reporting by David Dolan; Editing by Stella Mapenzauswa and Jane Baird)

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