OLD Mutual Ltd’s last minute pull-out from its merger talks with Trust Bank has narrowed the bank’s survival options since it has been hunting for a financially stable partner to help it out
of the mounting debts and liquidity crunch for the past four months.
Old Mutual’s unceremonious exit from the crucial talks has exposed Trust Bank. It intended to buy into the bank through MBCA, a merchant bank in which the insurance giant has interests, but pulled out of the talks after it emerged that Trust had holes in their financial books.
Trust is currently led by Dominic Magwada, who took over from William Nyemba, the bank’s founder.
Had the deal with Old Mutual taken off Trust would have become the nation’s largest financial institution. A due diligence report on the deal revealed that Trust’s debt to the Reserve Bank of Zimbabwe had shot up to $645 billion over the past four months.
The confidential report, leaked to the press, also said the debt would continue to increase. It also made reference to the suffocating interest rates that the central bank was charging under the Troubled Banks Fund (TBF), which had been loaned to Trust at the beginning of this year.
South African-based Nedco through which Old Mutual owns MBCA is understood to have lost interest in the marriage after indications that Trust was technically insolvent.
These unexpected developments have left four realistic options for Trust Bank to remain afloat. The bank has since confirmed that it is scouting for alternative means for survival after the Old Mutual talks fell through two weeks ago.
A recapitalisation exercise through a Rights Offer could be a viable option. The central bank could also offer respite by turning its debt into equity.
Other alternatives would be to find another financially sound institution to merge with or to persuade the central bank to reduce its interest charges on the loan to the bank. Experts say while the idea to raise funds through a rights issue could bring positive results its success hinges on the shareholders’ appetite to follow their rights.
“Judging by the subdued confidence in the banking sector, shareholders could be reluctant to respond positively to a Trust Rights Issue Offer. In short, they may not follow their rights which means the recapitalisation would flop,” said a stockbroker.
This option also depends on Trust’s ability to persuade the institutional shareholders to support the fundraising. First Mutual Ltd (FML), which has 27% in the bank, is one of the institutional investors likely to support a recapitalisation exercise.
Outgoing FML chairman, Ian Makone told shareholders at the group’s annual general meeting two weeks ago that the company was prepared to participate in any activity that would save Trust from imminent collapse.
However, analysts remain sceptical of FML’s financial muscle to help the bank out the current malaise. They note that the insurance giant is yet to recover from crippling loses suffered by its subsidiary, First Mutual Asset Management when it lost close to $25 billion in the ENG Capital Investment saga.
The RBZ could also come up with a rescue plan by turning Trust’s debt into equity. This according to officials privy to the issue has become one of the most attractive and practical options for Trust.
Under this arrangement the RBZ would have to form a new company to house the shares or to use its investment company Finance Trust of Zimbabwe (Fintrust). Fintrust already has shares in the other listed firms like Cairns Holdings, Tractive Power, and Astra Industries.
Judging by its recent press statements it seems that the central bank is committed to continue pumping out funds to save the institution. The interest charges, described as exorbitant by some banking officials, have added to Trust’s financial woes. Banks that take on the Troubled Bank Fund are required to pay a 300% interest rate.
On the other hand there is nowhere a bank could make a 400% return when the interests rates are hovering around 120% on the market. A cut in the interest rate would create some breathing space for Trust but create a bad precedent in the banking sector, experts argue.
“I don’t see the central bank doing that. It would be a preferential treatment for Trust. Other banks would certainly feel cheated,” said an analyst with a local bank.
But will the central bank let Trust sink? No, say experts who are quick to point out that RBZ governor Gideon Gono has promised that no bank would be allowed to crash under his tenure. Trust’s demise is also likely to have a serious contagion effect on other banks, companies and the whole economy.