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Johannesburg - Investec [JSE:INP] shares dropped nearly 5% in London after it raised £138.3m (3.1bn), about £6.7m (R150.5m) less then expected, by selling equity to buy back preference shares it and other South African banks issued about a decade ago. Stock was originally sold mainly to fund transactions aimed at boosting black ownership of the economy.
Investec dropped as much as 4.7% in London to the lowest since February 24. The shares were trading 4.6% weaker at 449.5 pence as of 16:25. In South Africa, it was trading 2.22% lower at R103.81 on Friday at 06:30.
Investec sold 30.87 million shares, about 4.9% of the bank’s issued share capital before the sale, at 448 pence per share, the London- and Johannesburg-based lender said in a statement on Thursday. Having raised this money, Investec expects to pay £5.70 for the sterling preference shares it issued and R100 for the rand preference shares plus amounts for unpaid dividends.
The 30-day simple moving average for Investec’s London stock by Wednesday’s close was 497.07 pence, according to data compiled by Bloomberg. Shares were sold on Thursday at an almost 10 percent discount to that price.
Appropriate time
“It is an appropriate time for us to make the tender offer for the preference shares,” CEO Stephen Koseff said on a conference call before details of the sale were announced. The transaction, which takes place as preference shares are phased out as capital instruments over the next two years, will have a positive impact on the company’s core equity Tier 1 ratio, he said.
A decline in capital-adequacy ratios, and pending rule changes on how cash is measured which banks need to set aside, are prompting lenders to review the status of preference shares, which typically have priority in the payment of dividends. Financial institutions including Standard Bank and FirstRand issued about R22bn of preference stock between 2004 and 2007 to fund the sale of stakes to black investors to make up for discrimination during apartheid.
Taking action
Under Basel III regulations, the shares will no longer be defined as core Tier 1 capital. As lenders try to boost their capital levels to meet the new benchmarks, they can buy back and cancel the shares or swap them for new instruments.
The buyback will be done at a “significant premium to the price on the Johannesburg Stock Exchange and the Channel Islands,” Koseff said, adding that the preference shares trade at about R96 and £4.50 each. Investec, which trades its stock in London and Johannesburg, owns a bank and money manager in South Africa and the UK.
While the likes of Standard Bank is waiting for the central bank to publish a final framework before considering what to do with its preference shares, other South African lenders including Nedbank and Capitec have begun to buy back the instruments.
Investec’s buyback, which still has to get shareholder approval at the annual general meeting, may lift the group’s common equity Tier 1 capital ratio to as much as 11.2% from 9.7% as at the end of March, according to the bank.
