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Futuregrowth ends 'capital strike' against Sanral

Jul 05 2017 16:14
Adiel Ismail

Cape Town - Futuregrowth Asset Management may start lending again to the SA National Roads Agency after a ban which lasted almost a year.

This followed a governance review, in which Sanral agreed to make a notable change in policy relating to Politically Exposed Persons (PEP).

"We are now removing our self-imposed embargo on trading Sanral debt instruments," Futuregrowth stated in a lengthy review published on it's website on Wednesday. "This does not necessarily indicate the resumption of funding to Sanral but rather that Futuregrowth may now sell, hold or buy Sanral debt instruments."

The asset manager, which has about R170bn in assets, is Africa’s biggest specialist fixed-income money manager.

Futuregrowth shocked government with an audacious move on August 31 last year by pulling the plug on negotiations of more than R1.8bn of debt finance to some of the largest state-owned enterprises (SOEs).  

At the heart of this decision were concerns over governance, decision-making, government infighting and perceived threats to the independence of the finance ministry.

At the time Futuregrowth suspended talks with Sanral, Eskom, Transnet, the Landbank, the IDC and the Development Bank of Southern Africa (DBSA).

It then engaged with each of the SOEs affected to gain an understanding about the independence of Boards, Investment Committees, Credit Committees and Procurement processes.

Following these reviews, the asset manager lifted its lending freeze to the DBSA and the IDC in November and the Landbank in September. Eskom and Transnet remain in the cold.

Reviewing Sanral

Futuregrowth said in a statement that it’s review of Sanral revealed that the road agency’s current governance practices appear adequate, but there are areas where it does not believe they meet the standards required by responsible investors in public capital markets.

“We are concerned that the Sanral Act and the existing governance framework have few controls to prevent a speedy degradation of governance or practices,” said Futuregrowth analyst, Tarryn Sankar.

She said the asset manager is notably concerned that the Sanral Act gives wide powers to any Minister of Transport to unilaterally and materially alter the Board of Directors.   

Futuregrowth noted that it would be more likely to take a long-term view of Sanral debt if there were improved protections against adverse changes in Sanral’s Board, and better reporting to the capital market.

“Failing those changes, future debt advances may be limited to short- or medium-term debt,” said Sankar.

Futuregrowth has made a number of recommendations, including to strengthen the Board and its sub-committees. Some of these entail increasing the number of Board members, improving the Board’s skills mix and introducing more staggered terms for directors.  

Sanral and Futuregrowth have come to an agreement on the introduction of a PEP policy. This will be considered for implementation by the Board during 2017.

“A PEP policy is vital to cover potential risks associated with Sanral’s large-scale procurement programme,” explained Sankar.

Futuregrowth said while Sanral indicated that it has had no procurement from PEPs in the past, they have agreed to an annual disclosure of transactions with PEPs should there be any.  

The roads agency agreed to implement a “cooling off” period of 12 months during which ex-directors and managers would be prohibited from doing business with the company.

Futuregrowth also proposed changes to Sanral’s loan agreements to protect against adverse changes to the Board.

“As a borrower in the public capital markets, Sanral has a responsibility to provide relevant, timely and transparent information so that investors can make informed investment decisions,” said Olga Constantatos, head of credit at Futuregrowth.

'Confirms good governance'

Sanral chief financial officer Inge Mulder said Futuregrowth’s decision to return investing in Sanral debt instruments should contribute to a wider sense of confidence in the SOE’s corporate governance.

"[It] will contribute to broader confidence within the investment community".

Mulder indicated that dialogue with investors will continue to cement this confidence and thereby ensure that the bond market remains a viable funding instrument for national road infrastructure.

“Sanral remains a well-run institution with good bond market credentials. This makes it a prudent investment choice at a time when investment in road infrastructure is vital to South Africa’s future developmental trajectory,” she said.

Making improvements

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