The Registrar of Collective Investment Schemes (CIS) will allow CIS managers to create new funds, known as “side pockets”, to host African Bank Investment Limited (ABIL)’s debt instruments. The move seeks to assist managers to segregate the less liquid ABIL assets within their portfolios from the remaining assets and in so doing limit new investors into the fund from exposure to the ABIL debt. The side pockets will only be open to existing investors in the related fund at the time of its creation.
Should a CIS fund elect to create a side pocket for ABIL debt:
- The ABIL assets will be transferred from the main fund to the secondary side pocket fund.
- Unit holders at date of creation of the side pocket will be allocated their proportional units in this fund.
- Each affected unit holder will therefore have units in 2 funds: the originating fund and secondary fund, the aggregate of which will be equal to their investment in the originating fund before the secondary fund was created.
- Any new investment in the originating fund after the side pocketing will not be exposed to the ABIL debt.
- As and when the ABIL debt matures and is settled by the curator of ABIL, unit holders in the secondary portfolio will be paid out their proportionate share, according to their unit holding.
- In the event that a fund manager chooses to deal with its ABIL exposure in this manner, the manager will be required to communicate with its investors in this regard, and regularly provide a report to the investors on the status of the side pocket, in line with the principles of Treating Customers Fairly.
As at the close of business on 18 August, the Registrar received applications for side pocket portfolios for 50 funds exposed to ABIL.
Business Day reported on Wednesday that the FSB had approved applications from 20 funds to ring-fence their exposure and was looking at 23 other applications. Once all had been approved, the value of the African Bank debt that would be “side-pocketed” was about R4.3bn, according to the FSB.
The Regulator also indicated that there was a net outflow of R10bn from August 11 to August 18 in the money market funds as people moved to avoid exposure to African Bank debt.
The downgrading of Capitec Bank, and two days later the big four, was met by disbelief by the banks as well as the Reserve Bank, who said that Moody’s concern over the lower likelihood of sovereign systemic support was “in sharp contrast to the support actually provided” by it to African Bank.