Foreign investors are unhappy with African Bank’s buyback of debt issued under its euro medium-term note (EMTN) programme, as these investors – discouraged by low interest rates elsewhere – search for yield in emerging markets.

Lutz Röhmeyer, portfolio manager at Landesbank Berlin Investment, said the fund manager had tendered only a “small portion” of its holdings to the buyback because it saw further upside in African Bank, which would be paying at least 200 basis points – or 2% – less in interest following the buyback.

“This bank is now overcapitalised after the rescue,” said Röhmeyer.

Swiss franc-denominated bonds held by the Landesbank – which manages about €10bn in investments – should trade higher than dollar-denominated bonds as “everybody is looking for yield in this environment.”

“[African Bank’s] name is burned in the market after the rescue, and the chance that it trades up to a fair price is very low,” he said.

“There will be a risk premium for a very long time.”

This risk premium has proven lucrative for foreign investors, but African Bank is now using spare cash from R10bn received during its curatorship, along with a substantial cash pile from the old African Bank, to pay off some of its foreign debt before it matures.

Political uncertainty in the developed world served to boost this risk premium, according to UK asset manager Aviva Investors.

African Bank reopened doors under former WesBank CEO Brian Riley in April after nearly two years in curatorship. It has bought back about half of the notes issued as part of the EMTN scheme, spending $532m on the Swiss franc-and dollar-denominated bonds.

Its treasurer, Gavin Jones, previously told Business Day that the listed foreign currency bonds were among the bank’s more expensive debt. The notes it has bought back thus far had interest rates between 4% and 8.125%, and due dates of November 2018-April 2022.

“African Bank is likely to consider any opportunity to repurchase expensive debt, based on the market fundamentals at the time and given that the bank still has unproductive foreign exchange cash on the balance sheet,” Jones said.

A domestic investor has, however, welcomed the bank’s efforts to relieve the burden on its balance sheet. Futuregrowth Asset Management’s Wafeeqah Mallick said while the fund manager would have preferred the bank to repurchase all of its debt on an equal footing, it was comfortable with the strategy.

Senior bond holders swapped debt in the old African Bank for debt in the new bank while having to write off 10% of their holdings and taking another 10% in cash. (Business Day South Africa)

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