How a South African investment fund lost millions funding taxi financiers

The Mi-Plan IP Enhanced Income Fund exposed R957 million of its assets to taxi financiers, losing millions in the process as Bridge Taxi Finance defaulted on the loans.

This is feedback from a senior investment analyst at Morningstar South Africa, Michael Kruger, who explained what happened with Mi-Plan’s fixed-income investments and the bigger problem it exposed. 

For Kruger, the default of loans provided to Bridge Taxi Finance, causing Mi-Plan’s fund to lose R957 million, highlighted the complexities of investing in risky fixed-income assets in search of inflation-beating returns. 

Although it doesn’t appear that these potentially defaulting loans were widely held across local funds, the well-known Mi-Plan IP Enhanced Income Fund had around 8.7% of its assets invested in these floating-rate notes. 

This fund had around R11 billion in assets under management at the end of January 2024, meaning about R957 million was exposed to these loans. 

Due to uncertainties surrounding their valuation, these instruments have been moved into a ‘retention fund’ separate from the main fund and will not be accessible to investors.

Although potential defaults such as these are not uncommon for fixed-income funds, the event does raise questions about the pricing of potential credit risk in South Africa.

What happened

At the start of the year, two SENS announcements were released regarding the structured products created by Redink Rentals and Martius in their relevant note programmes. 

Within these programmes, investors were given exposure to two special purpose vehicles (SPVs) linked to Bridge Taxi Finance. 

The SENS announcements issued by the JSE indicated that Bridge Taxi Finance had defaulted on the interest payments on certain instruments and that caution should be exercised when dealing with the products.

Martius’ notes financed the importation, insurance in transit and licensing of new taxis. Redink’s notes, on the other hand, financed the securitisation of debt once the taxis had been sold and leased to owners. 

Bridge Taxi Finance, established in 2013, provides development credit finance to South African entrepreneurs in the minibus taxi industry.

The default on the interest payments on the notes appears to be caused by economic strain linked to rising interest rates, high inflation, a slowdown in new vehicle sales, and elevated petrol prices. 

All of these factors pressured Bridge Taxi Finance’s clients’ ability to meet their debt obligations. 

In addition, Martin Bezuidenhout’s passing in January 2024, the CEO of Bridge Taxi Finance and its operating company, Mokoro, has placed a significant strain on the business.

Mi-Plan’s involvement 

The Mi-Plan IP Enhanced Income Fund, a popular multi-asset income fund, was a big holder of the defaulting Redink and Martius notes. 

Under the direction of the manager of the Mi-Plan fund, Vunani Fund Managers, the company announced the default on interest payments created material uncertainty as to the current valuation of the notes.

As a precautionary measure, interest accruals were suspended on these notes on 9 February 2024. 

The company announced that it would move the impacted assets into a retention fund separate from the main fund to allow time for adequate analysis of these instruments’ valuations. 

This effectively leads to the assets being side-pocketed in a separate portfolio from the existing fund.

The side-pocketed assets in the retention fund are not lost to investors but rather transferred to the newly created fund. 

It is important to note that while the main fund will continue to operate normally, investors cannot redeem their units in the newly created retention fund unless circumstances change. 

The main objective of the side pocketing is to protect existing and new investors, whether exiting or investing in the main fund.

On 1 March 2024, Vunani Fund Managers, the manager of the Mi-Plan fund, announced that they would write down the assets in the retention fund as of 1 March 2024.

Despite the SPV’s satisfactory performance, financial distress at the overall sector level led to subpar collections, impacting the notes’ valuation. 

Legal restrictions prevented the issuer from providing Vunani with the detailed data needed to perform a valuation of the notes. 

Based on the available information, Vunani decided to write down the value of the instruments by between 20% and 40%, depending on the seniority and claims to underlying cashflows.

A recent Citywire article noted that BCI’s Saffron BCI Opportunity Income and Saffron BCI Active Bond funds held about 3% and 2% of the notes, respectively. 

BCI has written down the value of the instruments to similar levels and also side-pocketed these assets.

Wider problem

The recent credit event has raised questions about the current pricing of corporate credit in the South African environment. 

Income funds in South Africa have received significant inflows over the past few years as riskier assets have struggled to deliver significant inflation-beating returns.

Morningstar has also seen a significant number of new fund launches over the past ten years as fund managers have looked to capitalise on the growth in local fixed-income funds.

Kruger said that this has raised questions about the possibility of too much money chasing too few deals.

Companies continue to face multiple headwinds from high interest rates and inflation, weak economic growth and poor consumer and business confidence. 

Kruger said it is more important than ever that fund managers are pricing credit risk appropriately. 

This includes sizing positions appropriately and not taking outsized positions to a single counterparty that may materially impact investors in the event of a default. 

Given the large number of offerings available in this space, it has become common for certain funds to try and stand out from the crowd by taking on undue illiquidity, interest rate or credit risk. 

This search for yield and reaching for returns can sometimes result in disappointing outcomes for investors, particularly in the event of a credit event or interest rate movements.