African Bank’s (ABL) share price has collapsed in spectacular style this week. On 30 June 2014 the share price closed at R6,79 which translated to a market capitalisation (market cap) of over R10bn. By the close of JSE yesterday, the share price had dropped to R2,70 implying a market cap of just over R4bn. And today the share price fell even further, and reached a low of 28 cents per share*, this implied a market cap of around R420m. At 2pm today the share price had recovered to 88 cents per share* – this implies a market cap of approximately R1,3bn.
In terms of Regulation 28 of the Pension Funds Act, a Retirement Fund is allowed maximum exposure of 10% of Fund assets to an equity with a market cap of between R2bn and R20bn. Once ABL’s share price dropped to below R1,34 per share, ABL’s market cap fell below R2bn.This means that the new maximum exposure limit to ABL is now 5% of Fund assets.
Have you checked your ABL exposure yet?
If the Fund is more than 5% exposed, don’t panic – you have 12 months in which to resolve the breach. This breach is classified as a SOFT breach – this means that the breach was as a result of market movement and not through an active trading position.
There are, however, rules for soft breaches:
1. None of the managers can add to their ABL positions while the Fund’s exposure is in breach
2. If ABL’s market cap remains below R2bn between now and 6 August 2015, the Fund would need to reduce their exposure to ABL to bring the Fund’s total ABL exposure to below 5%. This 12 month period would start today.
But this is still the low-impact side of ABL – the real impact is on the exposure to money market and fixed income securities, most of which is unsecured debt. The total exposure to ABL’s outstanding debt instruments is in the tens of billions of Rands. As most money market instruments are unlisted it is difficult to put an accurate Rand value on the total ABL exposure.
At a market cap of between R2bn and R20bn, a Retirement Fund is allowed a maximum of 15% exposure per issuer# and a limit of 25% in terms of money market and cash exposures. There is also a maximum overall limit of 25% to any one issuer#. Now that the market cap is below R2bn, a fund can continue to hold up to 25% in cash and money market exposure, but the exposure to longer duration instruments (fixed income or bonds) must now be reduced from 15% to 10%. This would, again, be classified as a SOFT breach and the 12 month monitoring process would apply before actual trading is required.
Retirement Funds will bear some heavy losses – the market does not want to buy ABL shares or fixed income exposure – for fear of losing capital permanently. This means in order to sell the assets, it must be sold at a discount which means even more losses. The market will be flooded by managers selling off their equity and fixed income assets – to bring the exposures within compliance limits and reduce further capital risk – which means the resultant loss bearer is the member in the retirement fund.
Regulation 28 [2(c)(vii)] and [2(c)(viii)] does refer to verifying the credit rating of instruments and understanding the changing profile of assets in terms of credit risk. As part of risk of a comprehensive risk analysis process, the risk to ABL (equity and fixed interest) could have been determined e.g. by using a “distance to default” model that links the equity share price to a default probability analysis for fixed interest assets. A continuous fall in the share price, over time, leads to a greater default probability. Although this is not an exact science, risk management can assist in capital protection.