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.

Click here (then “like” the page) to follow Bruce on Facebook.

Enter your email address in the form below to receive a newsletter containing the most-read articles of the week from Bruce Whitfield’s The Money Show every Friday morning in your inbox.

Subscribe to our Business Wrap Newsletter


Recommended

by NEWSROOM AI
Read More
Sun City is losing money

Sun City is losing money

Sun International slashed the value of its prize asset by R306 million. Bruce Whitfield interviews its CEO, Anthony Leeming.

Burger King to open 45 more restaurants in South Africa, despite losing money

Burger King to open 45 more restaurants in South Africa, despite losing money

Bruce Whitfield interviews Mohsin Tajbhai, acting CEO at Grand Parade Investments, the owner of Burger King in South Africa.

I come from having very little, to having a lot - Craig Gradidge

I come from having very little, to having a lot - Craig Gradidge

The Money Show’s Bruce Whitfield interviews Gradidge about his attitude to money (hopes and fears, successes and failures, etc.).

'The next Steinhoff is around the corner!'

'The next Steinhoff is around the corner!'

The Steinhoff-debacle happened while the world praised SA for its auditing standards. Bruce Whitfield interviews Dr Steven Firer.

What if Earth’s solutions are in space?

What if Earth’s solutions are in space?

Bruce Whitfield interviews theoretical physicist and extraterrestrial hopeful, Dr Ariana Marais

Costa Rica went from broken and poor to brilliant and prosperous in 15 years

Costa Rica went from broken and poor to brilliant and prosperous in 15 years

A story of hope for South Africa. The Money Show's Bruce Whitfield interviews Dr Adrian Saville (Cannon Asset Managers, Gibs)

Popular articles
[LISTEN] The concept behind The Leonardo - Sandton's new skyscraper

[LISTEN] The concept behind The Leonardo - Sandton's new skyscraper

The Leonardo in Sandton may become the tallest building in Africa.

New Ipsos poll shows ANC winning 2019 election, rates Ramaphosa a vote puller

New Ipsos poll shows ANC winning 2019 election, rates Ramaphosa a vote puller

Senior client officer at Ipsos, Mari Harris says President Cyril Ramaphosa's trust index is higher than other leaders.

'Its not good enough to say you just found out that SA trains are never on time'

'Its not good enough to say you just found out that SA trains are never on time'

Eusebius McKaiser shares his views on president Cyril Ramaphosa's train expirience on Monday.

Kilometres of boiler tube leaks 'are biting us big time' says Eskom COO

Kilometres of boiler tube leaks 'are biting us big time' says Eskom COO

Eskom's Jan Oberholzer says it has discovered boiler tube leaks which continue for kilometres and is working to repair this.

'The next Steinhoff is around the corner!'

'The next Steinhoff is around the corner!'

The Steinhoff-debacle happened while the world praised SA for its auditing standards. Bruce Whitfield interviews Dr Steven Firer.

Load shedding will be resolved permanently in a few weeks - Fikile Mbalula

Load shedding will be resolved permanently in a few weeks - Fikile Mbalula

ANC head of elections, Fikile Mbalula says the president is hard at work to resolve Eskom's problems.

Did you know? SA exports electricity to seven countries in Southern Africa

Did you know? SA exports electricity to seven countries in Southern Africa

Senior Researcher at Africa Check Kate Wilkinson shares their latest from their fact-finding missions.