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Canter sounds alarm on unsecured property debt

Cape Town - Institutional investors taking on the property industry’s unsecured debt risk losing out financially, according to FutureGrowth chief investment officer Andrew Canter on Wednesday.

Canter told Fin24 that he had two concerns with property and unsecured lending.

“The one is the structural problem that property companies are [getting] funding in the public capital markets by issuing unsecured debt to institutional investors, who don’t seem to be paying attention to the fact that they’re basically subordinated creditors to the banks, who hold the mortgage bonds,” he said.

“There’s an asset liability mismatch, because a lot of the debt is shorted … and yet you’re buying long-dated buildings,” he explained. “You don’t fund a 20-year asset like a building with three-month money, it’s just an inappropriate thing to do.”

Canter said the underlying core problem was that institutional investors didn’t “seem to understand that and they don’t negotiate with counter parties”.

Investors are not engaging

He said institutional investors buy what’s sold to them rather than “engaging intelligently or productively to negotiate terms, conditions, covenants and securities”.

While Canter said this issue won’t blow up into a major problem, he said it hints that the way bonds are sold and purchased globally is not appropriate.  

“It’s the whole capital market and the way it’s functioning,” he said. “The institutional investors are not working productively alone or productively together to improve standards and it must eventually lead to failures and it must eventually lead to money being lost.

“If you can imagine a situation where borrowers are allowed to write their own loan agreements, that’s actually what’s happening,” he said.

“The borrowers write the … [loan agreement] with their lawyers and bank advisers and they come in and institutions lend them to that arrangement.”

AUDIO: Interview with Andrew Canter

Banks have life cycles

Canter said while South Africa’s banking sector had a “superior regulatory framework”, banks had life cycles.

Canter was expanding on the statement he made in his speech to the Actuarial Society of South Africa’s Investment Seminar in Cape Town on Wednesday, when he said that in the last 20 years, 18 banks in South Africa either almost collapsed or did collapse.

“What I’m trying to demonstrate is that banks have life cycles,” he said. “They’re not permanent entities. They are entities that come and go.

“In the old days, you would assume that particularly a big bank, if it got in trouble; it would be one way or another bailed out by the Reserve Bank, or supported, or sold to a friendly party, or something, so that depositors and institutional investors would not lose money.

“In the future, banks will fail … and you will lose money,” he said.

“The African Bank example is not just a weird, once off … example – it’s the reality of the future. Senior lenders will lose money.

“They will be given haircuts if they like it or not.

“The game is changing globally and domestically that banks are riskier now as an investor than they were in the past.”

Investors should put customers first

Canter bemoaned the fact that investors were unable to “get together and work together in a cooperative way for the benefit of all of our investors”.

“When we sit and talk to each other as investors… it seems adversarial, like we’re enemies,” he said.

“[While we are competitors], the reality is that our interests converge on the health of all of our clients, which are the same client lists, by the way.

“I find that very frustrating and almost irresponsible,” he said.

“Investors should be more attuned to the people they’re actually providing capital to.”


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