UPDATE 2-South African central bank to oversee $940 million Abil rescue

Sun Aug 10, 2014 2:04pm EDT

* Consortium of banks to underwrite R10 bln capital raising

* African Bank placed under outside supervision

* Senior bondholders to take 10 percent haircut

* Central bank guarantees retail deposits (Adds details, background and comment from central bank governor)

By David Dolan

PRETORIA, Aug 10 (Reuters) - South Africa's central bank stepped in to rescue unsecured lender African Bank Investments on Sunday, placing it under external supervision and announcing plans for a $940 million capital injection underwritten by local lenders.

The rescue, which will see the South African Reserve Bank acquire the lender's 17-billion-rand ($1.6-billion) bad loan portfolio, follows an investor exodus from African Bank earlier this week after it warned of a full-year loss and said it needed a massive capital raising.

Abil, as the bank is widely known, has been crushed by waves of bad loans as its core market of low-income borrowers have failed to repay debts, struggling with high unemployment and rising fuel and food costs.

"This is something that is not done lightly," central bank governor Gill Marcus told a news conference. "There is a private (and) public sector responsibility, given the nature of African Bank and its clients and its role."

Abil has been put under curatorship, or outside supervision, led by Tom Winterboer, an executive from Pricewaterhouse Coopers, Marcus said.

A group of local banks, including Standard Bank and FirstRand as well as Abil's second-largest shareholder, the state pension fund, would form a consortium to underwrite a 10 billion rand capital raising.

Abil would be split into a "good bank", representing a loan book worth 26 billion rand after bad debts, and a "bad book", Marcus said. The central bank would acquire the 17 billion rand "bad book" for 7 billion, she said.

DEPOSITORS PROTECTED

While Abil has relatively few depositors, it relies on the bond market for an overwhelming amount of its funding, Marcus said the central bank would make an "unequivocal commitment" to retail depositors that their money was safe.

Holders of the bank's senior debt will see the bonds restructured and assumed by the "good bank" at 90 percent of face value, meaning a 10 percent write-down in the value of their assets.

Shareholders and investors with Abil's subordinated debt will be "afforded the opportunity to participate in the good bank" Marcus said, likely meaning that holders of junior debt will see those investments turned into equity.

Marcus said the curator and the Johannesburg Stock Exchange would meet to discuss the bank's listing on the exchange; it was not immediately clear if it would be delisted.

Investors fled shares of Abil last week, and sent its bond yields soaring on concerns the bank might not be able to ride out the downturn.

At one point last week the bank was worth less than $100 million - a precipitous decline for a company that at its height was worth more than $2 billion.

The central bank has said the problems were largely due to Abil's "unique business model" and that there have been no indications other local banks have been negatively affected.

Abil is closer to a payday lender than a traditional bank.

In recent years South African banks turned to unsecured credit - such as personal loans - to offset weak demand elsewhere. But most commercial banks have reined that lending in as a weaker economy prompted more customers to default.

Leon Kirkinis, who resigned as Abil's chief executive on Wednesday, built the bank into one of South Africa's best known lenders by targeting low-income borrowers with expensive credit - a previously untapped market of people who had been traditionally ignored by banks during the apartheid era that ended in 1994.

But critics said those lending practices were unsustainable, especially after growth in Africa's most developed economy started to slow. ($1 = 10.6540 South African Rand) (Reporting by David Dolan; editing by Pascal Fletcher and Janet Lawrence)

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