South African Banks Eye Unsecured Loans for Loss-Absorbing Funds

(Bloomberg) -- South Africa’s biggest banks, who must start issuing billions of rand next year for a new loss-absorbing class of debt, will partly get there by rolling unsecured liabilities into the proposed instrument, Moody’s Ratings said.

The central bank estimates South Africa’s six largest lenders will need to raise as much as 360 billion rand ($20 billion) by 2030 in the new tool, which is designed to allow the orderly resolution of a big bank that runs into trouble. They need to start raising the funds in January.

Called financial loss absorbing capacity – or flac – instruments, they will be convertible into equity in a so-called “bail-in” exercise that avoids the need for a taxpayer bailout if a big bank suffers heavy losses that threaten its ability to stay open.

“The plan is to roll over maturing senior unsecured notes into new loss-absorbing flac instruments,” Moody’s Ratings Senior Vice President Constantinos Kypreos said in an interview on Tuesday.

Absa Group Ltd. and Nedbank Group Ltd. confirmed they plan to meet the new regulatory proposal in this manner.

“At Absa, the intention is that, in time, the domestic market will absorb the full flac amount within the portfolios currently holding the bank’s senior debt,” a spokesperson said in response to a Bloomberg question.

Capitec Bank Holdings Ltd., in contrast, said that it is primarily funded by retail deposits, rather than unsecured debt.

“We will issue separate flac instruments to meet the prudential requirement within the established timelines. There is sufficient market appetite to meet this requirement,” it said.

Officials at Investec Ltd. said they were consulting with South Africa’s Prudential Authority on an implementation plan, without providing details. Standard Bank Group Ltd. said it was in the final stages of formulating its issuance strategy. FirstRand Ltd. didn’t immediately respond to a request for comment.

The central bank’s draft plan also allows part of a bank’s excess regulatory capital to count toward the flac requirement, which lenders are supposed to have 60% filled by the end of 2027.

Kypreos said this will limit how much banks have to issue of the new layer of debt, which will be senior to equity and other forms of regulatory capital but subordinated to other unsecured liabilities.

Moody’s has welcomed the central banks plan and sees it as credit positive.

“If one of the big South African banks is in trouble and its capital is wiped out, authorities have the power to bail-in creditors,” Kypreos said. That would “avoid a government bailout using taxpayer money, or a liquidation that would be extremely disruptive.”