* 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 (Reuters) - 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 further details.
The bank’s shares surged 20 percent on the news, with some investors betting the deal could also make Abil an attractive acquisition target.
“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 last year.
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 more.
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