* Abil shares surge 20 percent on news of talks
* Investors welcome possibility of fresh capital
* Bank has been hit by bad debts, credit downgrade
(Recasts, adds comment and background)
By David Dolan and Helen Nyambura-Mwaura
JOHANNESBURG, July 7 African Bank Investments
said on Monday it was in talks to sell its loss-making
furniture business, sending its shares soaring as investors
welcomed the possibility of fresh capital for a lender hammered
by bad debts and a credit downgrade.
Abil, as the South African bank is called, had its
international debt rating cut to "junk" by Moody's in May,
reflecting widening concern about its ability to ride out an
economy weakened by months of labour unrest.
The bank makes most of its money from loans to low-income
borrowers, who have increasingly failed to make their payments
because of inflation, rising unemployment and the labour strife
in Africa's most developed economy.
Abil said in a regulatory filing it was in talks "regarding
the possible disposal" of the Ellerine Holdings furniture unit,
which it has been trying to sell since last year. It gave no
The bank's shares surged 20 percent on the news, with some
investors betting the deal could also make Abil an attractive
"If they sell Ellerine's it's going to be great news from
the market's perspective," said Nic Norman-Smith, chief
investment officer of Lentus Asset Management in Johannesburg.
"They'll get more capital and that helps the overall
business by allaying some of the short-term funding fears. It
would also make them more attractive to a potential suitor who
just wants to buy the bank."
Market participants have speculated for some time that Abil
could be an acquisition target if were able to sell Ellerine,
which contributed about a tenth to the group's annual revenue
Abil paid 10.6 billion rand ($983 million) for Ellerine in
2007 - more than the bank's market value of 10.1 billion rand as
of Friday's close - to widen its product offering to include
furniture sold on credit.
But a sharp downturn in Africa's most advanced economy has
hit its businesses, and its share price: the bank has lost
three-quarters of its value since a 2012 peak.
Last year it was forced to raise 5.5 billion rand through a
rights offer, and investors have said it may need to raise even
In May it reported it had swung to a first-half loss, hit by
a surge in bad debts. Moody's later cut its international debt
rating to below investment grade, citing concerns about
spiralling bad loans.
The bank has traditionally funded itself in the debt
markets, which means a credit downgrade could drive up the cost
of its international borrowing.
Abil's shares were up 19.3 percent to 8.03 rand at 1404 GMT
after earlier hitting 8.47 rand, and putting it on track for its
biggest ever one-day gain.
($1 = 10.7873 South African Rand)
(Editing by Ed Stoddard and Pravin Char)