Part bond industry - what's next?
On 1 March 2013, Absa Participation Bonds communicated its decision to terminate its scheme. Investors who have money in the scheme will have their participatory interests in the fund repurchased by the bank. As of 31 August, these investors will be forced to explore alternative investment and financing options. The Chairman of the Association of Participation Mortgage Scheme Managers in South Africa and CEO of FedGroup, John Field, weighs in on the closure and the future of participation bonds.
Absa has the largest participation bond scheme in South Africa, and by closing it, an important competitive opportunity for borrowers and investors is no longer available. The closure also means only one player remains in the South African participation bond industry, in the form of FedGroup. As the next biggest scheme, FedGroup is determined to continue its scheme and increase its size to fill the gap left in the market.
Absa has assured clients that all capital and interest earned will be paid over. But are the participants in the scheme, both borrowers and investors, being treated fairly?
"The cornerstone of the Financial Services Board (FSB) efforts to regulate the financial services industry is that clients must be treated fairly. In this case, it would be important to examine the terms, conditions and security offered by the bank compared with the participation bond scheme."
Field explains that the two options are very different. "The interest rates, terms of investment, and most importantly, the security offered by the bank, should be the same, or better. It is patently obvious that the security is not the same. A bank is an unsecured investment, whereas a part bond scheme is fully secure."
He points out a few options that Absa could adopt to ensure participants are treated fairly:
* Absa could ensure that the bank gives the same terms and conditions that the participants enjoyed with a part bond scheme, including a security registered for the sole benefit of the investors.* Absa could continue to run the scheme until all the commitments to the participants were fulfilled.* Absa could notify its participants of the alternative part bond scheme, which they could transfer their interest without costs.* Absa could transfer the scheme to another manager.
As for the future of participation bonds, Field asserts that they have an important role to play in the investment of individuals and the financial services industry. He firmly believes the industry should not be allowed to disappear as a viable competitor for finance in the industrial and commercial property industry.
Benefits of investing in a part bond
* Interest can be paid monthly or re-invested.* Rates can be fixed or fluctuating. The fluctuating rate tends to track prime lending rates.* Capital is secured and regulated in terms of the statute.* Investments as low as R5 000 can be made.* It is a five-year investment that can be ceded, sold or transferred if the invested funds are required urgently.* Interest received is tax free up to the individual tax exemption allowance.
According to Field, the participation bond industry will make a comeback, and the ideal players to get involved would be the big insurance companies. He has confirmed that the Association of Participation Mortgage Scheme Mangers will launch an active campaign to entice new participants into the industry. The association will also assist eligible interested parties in obtaining a licence from the FSB and in setting up the administration of a new scheme.