Zambia’s SEC takes over Madison Financial Services Group subsidiary – MAMCo for credit and liquidity risks

The Securities and Exchange Commission (SEC) in Africa’s red metal producer Zambia, announced on 02 March 2020 in a memo that it would with immediate impact effect temporarily take over Madison Financial Services Group Asset Management wing and subsidiary Madison Asset Management Company (MAMCo) Ltd due to license breaches. MAMCo has for years grappled with credit and liquidity risks exposing it’s investors to risks of not receiving their investment proceeds at maturity. MAMCo runs unit trusts, management of assets and stock broking.

Ignored signs in sky liquidity strains. MAMCo had a few years ago enticed investors by paying interest upfront on investments to attract more volumes in deposits. It ran two scheme types on fixed deposits the first being upfront Interest on investments while the second involved a higher spreads for duration risk if paid at maturity. In many instances MAMCo investment managers persuaded clients to both roll over and increase exposures at maturity for reinvestment purposes. In liquidity thin market like Zambia such practice signal liquidity strains. Roll overs usually signal lack of liquidity to absorb maturities as such the only way to mitigate default is to roll over and buy time to raise liquidity but this comes at a higher cost. This practice was more observed the 2015/2016 era when the Zambian financial market was in a cash crunch space as a consequence of energy bottleneck preceding liquidity risk era following the central banks tightening of cash reserve ratio and benchmark interest rate. 

The regulator took a long nap. MAMCo run a fixed income fund for more than 8 years for which it was not licensed to, obtaining liquidity in excess of K248million which was mis-invested in asset classes not consistent with the initial investment policy. MAMCo invested in real estate when property prices rose higher which resulted in liquidity being tied into assets to the extent that the entity struggled to meet maturity obligations for its investor clients. This prompted the asset management company to roll over client investments as it sought longer duration to liquidate some of its stale assets in a time property values plummeted. This was the genesis of the credit bubble for the MFS Group subsidiary. The regulator only issued a first letter in 2018 leaving the market wondering why it took so long to detect these anomalies. Some of the MAMCo executives have seats on the central bank board and where well aware of the mis-investments happening at the asset management company plus deposit taking for which MAMCo was not licensed to. This highlight disclosure and governance failures at this point.

Creditors up in arms. Disgruntled creditors set up committees that then exerted pressure on the MFS Group and its subsidiary to address the repayment bubble quagmire the governance failures created. This prompted forensic audit suggestions by the Securities and Exchange Commission that thereby announced a temporary take-over of the asset management company on 02 March. This move was dubbed necessary and long overdue to instil confidence back in the capital markets and to safeguard investor interests. The regulator would then aim to force the MFS Group shareholders to recapitalize MAMCo ‘to going concern status’ or face liquidation. 

Embattled with litigation for settlement risk. The Zambian press has reported an array of litigation claims by commercial banks demanding cover for obligations not met while pockets of retail investors have been up in arms having not received their investment proceeds which has led to further claims in potential litigation exposing the entity to settlement risks. These credit risk concerns have been all over the media for analysts to pick. For some investors, settlements endorsed by the legal process have been to receive straddled maturities over periods between 3-5 years morphing investors into lenders at agreed interest costs. This is a sheer case of mismanagement and over trading fuelling credit and liquidity risks for MFS Group subsidiary. The MFS Group subsidiary once suggested a Scheme of Arrangement – SOA a form of business rescue which would freeze any interest on fixed income to introduce unit trusts to be wound over a period of time. This suggestion was thwarted by investors who were much comfortable with recapitalisation by the shareholders. In the current company’s act shareholders and directors are liable to imprisonment for mismanagement or fraudulent activity as such observed in the case of MAMCo. The arm of the law is never too short to stretch and fish out perpetrators of mismanagement as was held in the celebrated case of Salomon vs. Salomon.

Deteriorating credit quality of the MFS Group. MAMCo also runs longevity risk of government bonds that it could have underwritten for life assurance policies. This could then impact brokerage businesses that channelled clients to the asset management company. This is concerning because deteriorating credit quality of the counterparty could affect the life assurance business systemically as loss of confidence could impact the entire MFS Group. On the other hand the MFS Group is exposed to potential systemic and reputation risk stemming from poor management and governance weakness of their asset management division which its shareholders are not exempt from looking at the shareholding structure.

The Securities and Exchange Commission has since appointed interim managers to provide oversight to the affairs for the asset management company until a time these issues are resolved. This is sheer case of governance control failures and the need for the regulator to remain awake if Zambia’s capital markets are to develop and remain afloat.  
 
The big question that remains in the market is, where was the regulator in all this?

The Kwacha Arbitrageur