Fee-hungry investment bankers might have cause to salivate at Sasol’s misery
Investment bankers must be licking their lips for the moment Sasol, whose share price has been battered by growing worries it may not be in a position to pay its mountain of debt, launches a potentially big rights issue.
Sure, Sasol has been mum about what options are on the table to contain the damage of the oil-price plunge on its capital structure ahead of an investor call next Tuesday.
But equity fundraising, estimated by several financial experts to be north of R50bn, seems likely after Saudi Arabia instigated an oil-market price war at the weekend with cartel member Russia.
As of late afternoon on Wednesday, the price of Brent crude, the global benchmark, was at about $36 a barrel, not far from the historic losses suffered on Monday, and at a level well below what Sasol, the world’s largest maker of liquid fuel from coal and gas, needs to pay its R121bn debt.
Sasol, which benefits from a higher oil price because it sells its synthetic fuel at the same regulated price as the likes of BP, Engen and Royal Dutch Shell, has not put a hedging programme in place to protect itself against wild swings in the price of the black gold.
So, provided Saudi Arabia continues to cut prices and unleash a torrent of oil to a wellsupplied market, it will be a foregone conclusion that the energy ministry will announce cuts in the price of petrol in April, immediately piling pressure on Sasol’s balance sheet. The company needs oil prices of R600-R800 a barrel to recover the cost of producing its synfuel and still make a decent return.
At this level you can be sure that Sasol’s creditors might be starting to feel discomfort at the prospect of a blowout in agreed ratios between Sasol’s core earnings and liabilities when it issues its earnings report later in the year. As of November, Sasol’s net debt to core earnings stood at 2.9 times, compared with Technically, a 3.5 times Sasol ratio’agreed s creditor with creditors. banks could immediately call the R121bn debt once the company is in breach of the loan covenants, but chances are it will be given some time, possibly six months, to repair its balance sheet
True, the company could potentially speed up its asset disposal programme, which might shore up its finances by as much as $2bn, but there are two problems: first, Sasol is in a desperate negotiating position to strike a commercially logical deal; and, second, the proceeds might not come quickly enough for creditors.
That leaves it with one or two options: tap shareholders for cash, or sell bonds that can be converted into a predetermined number of equity shares.
However, the latter seems an unlikely scenario for the company, whose debt was downgraded to junk by Moody’s Investors Service last week, because it will jack up interest payments.
The company’s investors
— the biggest being the Public Investment Corporation (PIC) and the Industrial Development Corporation (IDC) with a combined stake of about 24%, according to Bloomberg data
— will be on the hook then.
And if it happens, they will be annoyed for sure. Shares in Sasol dropped another 27% on Wednesday to R52.26, valuing it at about R33bn, a spectacular destruction of shareholder value for a company that was worth more than R400bn just four years ago. It’s now worth less than Mr Price.
A rights issue will also trigger a scramble for dealstarved investment bankers to get a piece of the action.
Figures from global financial markets data provider Refinitiv show that investment banking fees in 2019 inched up 3% to just more than $555m in SubSaharan Africa with overall activity, measured by the number of deals, barely growing to just 233.
If you strip out Naspers’s move to spin out and relocate its global e-commerce arm Prosus, a R1.7-trillion internet juggernaut, the fees in subSaharan Africa would probably reflect the overall dearth of meaningful deals in SA, the continent’s biggest capital market, where business confidence is at its lowest in decades.
For investment banking divisions of SA’s big banks, which have painted a gloomy outlook for the economy and earnings growth for 2020, Sasol might just dish up something to be excited about.
A POSSIBLE RIGHTS ISSUE BY THE FUEL PRODUCER TO AMORTISE ITS DEBT MIGHT BE THE ANSWER TO THE FINANCIERS’ PRAYERS