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<\/a><\/p>\nHappiness Zengeni<\/p>\n
22 December 2011<\/p>\n
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WHEN the economy dollarised in 2009, most companies took the debt route in order to raise capital, which had been eroded by hyperinflation. After the troubled decade, which saw capacity utilisation falling, companies thought it would be easy to utilise borrowings to kick-start growth in their operations and most of the plans going wrong owing to lack of cheap debt, companies had no choice but to take expensive debt.<\/p>\n
And in most cases, the debt was largely been short-term route, which came at a cost. While the majority of companies have some form of gearing on their books, a few firms have felt the brunt of high debt exposure.<\/p>\n
These include African Sun, AICO, CFI, Star Africa, RTG and RioZim. Medium to long term funding is difficult to obtain especially if a company does not have a ring-fenced off shore account.<\/p>\n
Firms have been adding to their borrowings and thereby squeezing out greater returns for their shareholders. African Sun’s borrowings are said to be in the region of US$30 million and the group is using an expected improvement in the volumes of the Zimbabwean business to return to profitability while it is still looking at long term debt. The group recently did a staff restructuring and disposed of the non-performing SA hotels and Hotelserve.<\/p>\n
RTG has short term debt amounting to US$15 million. The group wants to sell its Bulawayo hotel for US$10 million. RioZim’s troubles started when the economy was dollarised.<\/p>\n
In 2008, the major shareholders, the RioZim Foundation said it resorted to borrowings from RioZim in order to meet its recurring obligations. The foundation says that it all started when the group did not pay dividends therefore depriving it of its major source of income.<\/p>\n
At the time, the Reserve Bank of Zimbabwe did not pay what it owed, a development that worsened the situation for the foundation which was declared insolvent and had to resort to RioZim and its pension fund for liquidity support.<\/p>\n
RioZim planned a rights issue and wanted to do a debt for equity swap but arguments against the latter was that the costs would fall on shareholders and not creditors. The miner’s borrowings currently stand at US$57 million with the group anticipating a profit before tax of US$5,57 million in 2012 up from an expected loss position of US$8,74 million.<\/p>\n
Debt also remained a key issue at Aico where short term borrowings in the half year amounted to US$162 million with the group having to pay out a US$13,7 million interest bill. Of the borrowings, Cottco carried the bulk at $107,7 million while Seedco was owing US$46,5 million.<\/p>\n
The solution for most of the companies has been to do a capital restructuring which turns the high short-term borrowings into long term at a lower cost. “If the debts are sustained at existing levels, it becomes necessary to turn the debt into long term so that the company grows out of it over many years,” said a market analyst.<\/p>\n
Art has a three year plan, which will see the company reduce its debt of US$8,9 million in 18-36 months. Only US$1 million is in long term while the balance is in short term. The group plans to restructure nearly half of the borrowings to long term.<\/p>\n
There are some who have resorted to fire sales among them Interfresh, which will dispose of its head office stand in Graniteside at a cost of US$5,8 million to enable it to retire the entire short term debt of US$4,4 million. At its last analyst briefing in June, CFI said it aimed to reduce borrowings by US$7 million through the disposal of part of its stake in Windmill, Beira Grain Terminal and Dore & Pitt. The group also had a US$3,8 million facility from PTA which it had accessed.<\/p>\n
Art says it will retire some of its debt through disposals of the Zambia Building and Mutare Board and Paper Mills. Aico is disposing of its sub-scale units Exhort and Scotto. However, analysts said industry cannot deleverage by selling assets.<\/p>\n
Star Africa bought out Red Star minorities for US$300 000 but weeks later put a red hanger sale for Red Star assets, which they hoped would help solve the debt issues. However, Red Star was last week placed under provisional liquidation for just over US$8 million.<\/p>\n
Other companies that are heavily borrowed include Bindura, which has been under care and maintenance for three years as its parent Mwana Africa is failing to access enough funding for the nickel mine.<\/p>\n
In March, Willdale was looking to borrow US$4,5 million to refurbish operations and lift capacity to meet current demand. Turnall had to borrow to fund the import of fibre. Most of the borrowings were short term while a long term PTA loan was for the plant in Bulawayo.<\/p>\n
Other companies like Radar do not anticipate an increase in borrowings as revenue is picking up across the SBUs while they have also had access to cheap international money.<\/p>\n
Markets generally have a tendency to punish overextended firms with the share prices falling to record lows. CFI’s share price dropped to a 52-week low of 6c on Tuesday after the group delayed publishing its year end financial results. The group resorted to looking for capital in countries as far off as China. African Sun is at 0,6 cents.<\/p>\n
RioZim is trading on a 52-week loss of 82,5% at 35,01c with its year low price at 28c. The reason is simple; companies with a high debt exposure have the hard task of paying their interest obligations out of a flat or declining level of profitability.<\/p>\n
“The market is not wrong in selling-off in these counters because those firms that are unable to pay for their debt go bankrupt. In cases like Art, shrinking operating profits make debts that are otherwise manageable look horribly burdensome and they cannot use revenue alone in meeting their debt obligations, ” said Charity Chibaya, a market analyst.<\/p>\n
Analysts say companies were reluctant to raise funds through equity because this would signal a lack of confidence in the board. There were also issues to do with valuations of the companies as most wanted to value the company much higher than what it is worth.<\/p>\n
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