Futuregrowth has thrown its R170bn weight behind finance minister Pravin Gordhan, breaking ranks to take a stand against the erosion of corporate governance in SA’s state-owned companies.
Andrew Canter, chief investment officer at Futuregrowth, said his company would "suspend" all new loans to six state-owned enterprises (SOEs) — Eskom, Transnet, Sanral, the Land Bank, the Industrial Development Corp (IDC) and the Development Bank of Southern Africa (DBSA) — and would not extend their debt lines.
Canter’s company is not the first to take this step. The Financial Mail has found a number of smaller boutique investment houses have been cutting their exposure to state-owned firms for similar reasons; among them are Abax Investments, Aluwani Capital Partners and Denmark’s Jyske Bank.
It’s a sensational twist, indicating that some investors are willing to use their financial muscle to stand up to President Jacob Zuma’s patronage network and efforts to sideline Gordhan.
Given that state-owned companies borrow R1.3trillion from the private sector, it should be a worrying development for Zuma, who flew out of SA to attend a weekend G20 meeting in China as if nothing was amiss back home.
Canter says he was sitting with three funding proposals for two SOEs on his desk worth a combined R1.8bn when he realised "we didn’t have the information we required to make rational investment decisions".
"We’re worried now, in the world of politics, whether there’s political interference in lending decisions where money gets lent to politically connected persons or just to projects supported by politically connected persons, and we have to ask that question," he said last week.
There’s no question that politics has played havoc with the economy. Since news broke two weeks ago that the Hawks potentially planned to arrest Gordhan on what are widely seen as trumped-up charges, government bond yields soared as much as 60 basis points.
RMB fixed-income strategist Carmen Nel says the impact of these "higher effective funding costs will be up to R1bn" should bond yields remain elevated at current levels for the rest of the fiscal year — equal to the annual salaries of 3 000 nurses or teachers. Worse may follow, as SA’s slower growth could require greater borrowing, leading to an extra R5bn debt bill for the full year unless expenditure is reduced.
In this context, Futuregrowth’s move was a welcome, if unprecedented, form of investor activism against politicians. Its courage contrasts with the approach of other asset managers, including that of its parent company, Old Mutual, which distanced itself from Futuregrowth’s actions.
But Old Mutual SA CEO Dave Macready takes issue with the characterisation of Old Mutual as "gutless", arguing that it was Futuregrowth that stepped over the mark. "We don’t believe making a public statement in the media is the most appropriate forum. We believe the state-owned enterprises, particularly the ones mentioned in the statement, need to be engaged first-hand. So we regard their statement as unfortunate and regrettable," he says.
Picking his words carefully, Macready says "at this moment, we’re not intending to take any actions against Futuregrowth".
But it seems the last straw for Futuregrowth and those who have taken a similar approach was the announcement, two weeks ago, that Zuma is to chair a new co-ordinating committee to oversee SOE reform, effectively stripping Gordhan of this role. To many it seemed a case of the fox taking charge of the hen house.
Ryan van Breda, a portfolio manager at Prescient Investment Management, said it was this announcement that raised investors’ eyebrows, especially in the context of the debate over state capture, which had escalated since Zuma fired Gordhan’s predecessor Nhlanhla Nene last December.
"It’s brought to the foreground that you need proper disclosure over procurement at state companies," he says.
Eskom, which wants to raise R69bn this year to finish building power plants, is a case in point. Under CEO Brian Molefe, Eskom has hit the headlines for giving a R586m "prepayment" for coal to Optimum Coal, owned by Zuma’s friends, the Guptas.
Canter spoke about the need to ensure proper governance and clear oversight of decision making, including ensuring that "politically exposed persons" with specific agendas weren’t on the investment committees at state-owned enterprises.
At Eskom, for example, businessman Mark Pamensky is not only one of Eskom’s "independent directors" on its investment committee: he is also a director of the Gupta-owned Oakbay Resources.
Gordhan’s treasury department has tried to investigate these coal contracts, but has been blocked by Eskom. Instead, Gordhan has been targeted for arrest by the Hawks.
Canter says it isn’t clear if you can "take a five-or a 10-or 15-year view on the stability of the business if the governance is at risk".
Either way, Futuregrowth’s bold step has put it in the spotlight as a leader of the forces opposing "state capture". It also spawned attacks from the unofficial Zuma supporters club, which used social media to hit at Old Mutual.
Canter says the varied reactions are inevitable when you "throw quite a big rock in the pond like we did". "The entire Futuregrowth team, a racially diverse group, made this decision unanimously, knowing the storm and risk we were walking into. I’m just the mouthpiece," he says.
Canter, an American who came to SA in 1990 after studying at Bryant University, worked at FirstRand before transferring to Futuregrowth. It is a low-key Cape Town-based investment house which opened its doors in 1994, the year Nelson Mandela was elected SA’s first democratic president.
It may seem an arcane debate but that’s not the case. Any increase in government’s borrowing costs will reduce funds for social and economic spending and worsen the country’s debt dynamics at a time when its sovereign credit rating teeters on the bottom rung of the investment-grade ladder.
Futuregrowth was only reiterating concerns raised by ratings agencies this year when they granted SA a stay of execution on a downgrade.
SOEs are, after all, in a mess. The worst, like SA Airways, seem to get a new CEO every six months, directors frequently resign, and there is little transparency over contracts with politically connected people.
Aluwani Capital Partners, which manages R70bn in funds, began cutting its client's exposure to the bonds of some SOEs a while ago, citing concerns around the risks that had become apparent — both political and due to the economic cycle.
"Some time ago, our credit processes raised flags on a few SOEs, including Eskom and Sanral," says Aluwani’s Conrad Wood. With other parastatals where the risks hadn’t increased, Aluwani kept its exposure.
"We didn’t turn the taps off entirely, but toned down our lending in anticipation of the spreads (on these bonds) trending wider. We didn’t make a big song and dance about it, but we felt it right to protect our client portfolios from increasing risk."
Wood says while Aluwani still buys bonds form certain SOEs — like the Development Bank of SA and the Industrial Development Corporation (IDC) — the recent decision to place the SOEs under the oversight of Zuma has raised the risks.
"Unfortunately, this means that even the best-run SOEs are now at risk of being dragged into the mire," he says.
One SOE unlikely to get money from anywhere right now is SAA, which has been trying for months to raise funds.
Abax, which manages about R80bn, has almost halved the amount of SOE debt it has bought over the past four years.
Abax CEO Anthony Sedgwick says his company shares Futuregrowth’s concerns and was surprised by the hostile reaction from some quarters. "Our clients’ portfolios already reflect limited exposure to SOE debt due to the concerns raised publicly by Futuregrowth and a few more of our own."
Sedgwick hopes Futuregrowth’s public position will help improve the governance of state-owned companies, "a major determining factor in avoiding a ratings downgrade".
Rashaad Tayob, head of fixed interest at Abax, says the company hasn’t put a blanket ban on SOEs. "But it’s a function of the fundamentals and governance is obviously an important part of that."
The problem is that many SOEs have been run poorly, which has diminished credit quality and harmed the value proposition. "Take Eskom, which has been mismanaged for years. Medupi is more than five years behind schedule. Since it is not generating the electricity that was planned, there is a cash-flow shortfall and funding requirements have ballooned. In buying debt, I need to assess both the credit risk and whether the market will be able to absorb the quantum of debt required."
Though Futuregrowth’s decision may have been understandable, the market reaction was dramatic. Bond yields rose on Eskom and Transnet bonds. The rand fell 1.5%.
Still, some critics have taken aim at Futuregrowth, saying it has called on other asset managers to follow suit.
Not true, says Canter.
"There’s no industry collaboration. Each asset manager will do their own independent analysis and their own questioning, and then reach their own decisions."
He says Futuregrowth has never prompted other asset managers on how to act. "Look, we expect others to ask questions but we’ve never guided the investment decisions of other asset managers."
Perhaps out of fear of losing government business, few of the largest investment houses have followed suit. But other money managers welcomed the decision.
Asief Mohamed, chief investment officer at Aeon Investment Management, says "more asset managers should be doing that, coming out quite clearly".
Another asset manager describes it as "noble and courageous. I’m sure careers might be in jeopardy. But it was the alarm bell to wake up the investment community to what people have long suspected but have been too afraid to voice for fear of losing government patronage."
The decision may be little more than symbolic, given that SOEs can always lean on other sources of cash — including the Public Investment Corp.
Even so, it’s a powerful one.
Byron Lotter, a portfolio manager at Vestact, says: "These decisions are usually made quietly and quickly ... The difference (with Futuregrowth) is that it went public at a time when there have been calls for business to put its foot down and be vocal about government".