How Futuregrowth Asset Management dodged the Steinhoff bullet

The Money Show’s Bruce Whitfield interviewed Futuregrowth Asset Management Chief Investment Officer Andrew Canter.

Canter spoke about how to dodge bullets when lending.

Firstly, he says, you apply the “three Cs of credit”:

  • Capacity to repay (e.g. analysis of business, cash flows, profits, balance sheet, etc.);

  • Collateral if they don’t repay (e.g. take mortgage bonds, vehicles, receivables, etc.); and

  • Character of the borrower (e.g. Do you trust them? Are they sustainable? Do they intend to repay?).

If you can analyse those factors then you have a pretty good chance of getting repaid.

Seems simple!

Canter says they particularly pay close attention to the “character” test, “because if a borrower lacks integrity, then there is a good chance a lot of other information is not honest!”

African Bank (Abil)

For Futuregrowth, Abil failed the “character” test.

The microlending model was based on aggressive selling of loans to consumers, in a very competitive market (e.g. weakening standards for lending), and was not sustainable (i.e. they were impoverishing their own customer base).

On top of that, they had a habit of misrepresening the purpose of the consumers’ loans, and their own financial position (e.g. by their loose bad debt reserving).

They didn’t speak openly or honestly.

State-owned enterprises (SOEs)

Regarding SOEs, Futuregrowth did not actually avoid the problem.

In fact, their clients had (and still have) large exposure the SOEs, because they misjudged the intentions of their shareholder (Government), boards and managements, and, like other lenders/ratings agents/banks/etc. they overestimated the system of controls of SOEs.

Futuregrowth had to try to fix that problem after the fact, and before it got worse.

Steinhoff

Futuregrowth’s clients’ funds have no exposure to Steinhoff whatsoever (i.e. neither debt nor equity), and haven’t had exposure for many years.

Canter says they “assiduously/purposefully” avoided exposure to Steinhoff on the bases that:

  • Steinhoff was sufficiently complex (e.g. businesses, jurisdictions, accounting, structural) as to be nearly un-analysable from a credit perspective;

  • Their highly acquisitive nature (i.e. serially acquiring businesses) rendered year-on-year analyses moot and/or difficult, and also made credit ratios unreliable;

  • The company has a worryingly loose interpretation of their obligations under loan documents; and

  • There have been several allegations over the years of aggressive tax and accounting practices, as well as hints of other possible impropriety.

Final Note

If a lender doesn’t like one of the “Cs” of a borrower they don’t have to buy their bonds.

For equity managers, where Steinhoff is a large-cap share in a benchmark index, you are nearly “forced” to hold some (although you could be under- or over-weight).

This is one of the reasons Futuregrowth thinks passive credit funds are dangerous – they always end up very overweight to precisely the companies that have far too much debt!

For more detail; listen to the interview in the audio below.

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