Debt demolition ball
Banks allegedly ask big fees to underwrite PPC’s capital raising,
It’s no secret that PPC is suffocating under its R9.2bn debt pile, which is twice the size of its market capitalisation on the JSE.
But what is less known, at least by the public, is that the local banks on standby to underwrite its upcoming rights issue are allegedly making it even more difficult for SA’s biggest cement company to breathe.
The country’s big four lenders, Standard Bank, Nedbank, Absa and FirstRand’s corporate investment banking unit, Rand Merchant Bank, are allegedly charging PPC an arm and a leg in fees to underwrite the R4bn capital raising, according to a person familiar with the situation who cannot be named.
So high are the fees to underwrite the proposed share issuance that PPC is allegedly seeking alternative funding from international lenders.
There are said to be international banks that are sniffing around, willing to give a helping hand. This despite S&P Global Ratings slashing PPC’s long- and short-term credit rating to junk status last month.
The banks had cited as a concern their lack of confidence in the management and the board, the person said.
“They believe the board still lacks the skill and competency to run the company in the current environment,” the source says. The board was last year restructured after a heated public spat between then CEO Ketso Gordhan and chief financial officer Tryphosa Ramano.
“They are looking for a different management team and board, should they get involved,” the person says.
Many have criticised the appointment of outsider Darryll Castle as the company’s CEO for his lack of experience in the highly competitive cement business. The market is still awaiting the appointment of a chairman after former chairman Bheki Sibiya resigned in January.
It is hardly surprising that PPC is deemed an extremely risky client to lend to. Aside from the recent downgrade to junk, the company’s auditors, Deloitte, are unable to say whether it can continue as a going concern for the next 12 months.
One can gauge from the interest it was charged for a bridge loan just how risky it is deemed to be. Earlier this month PPC secured the R1.75bn loan it urgently needed to pay investors who elected an early redemption of the company’s notes. PPC was granted the loan at an interest fee of Jibar — the Johannesburg interbank average rate — plus 10%. Jibar is the rate banks are charged when they borrow from the Reserve Bank to fulfil shortand long-term obligations.
Jibar changes daily and depends on the period over which the loan will be repaid. Banks taking out a one-month loan from the Reserve Bank at present will pay interest of 7.1% on the loan.
A 12-month loan will bear interest of 8.58%.
PPC will most likely pay closer to 17% in interest for the R1.75bn loan paid to bond holders who chose to cut their losses following the recent thumping of the company’s credit rating to seven levels below investment grade.
This is because the company has said it intends to repay the bridge funding with the R4bn it plans to raise in the rights issue scheduled to take place on or before November 1. The exact date hinges on whether shareholders will approve the proposed capital raising.
PPC has declined to reveal what the underwriting fees on the capital raising would be.
It says the “nitty-gritty” of the transaction will be disclosed in a circular that will be distributed after the August 1 general meeting, where shareholders are expected to vote on the proposed rights offer, among other things.
“Providing such information [before the general meeting] would be in breach of JSE listings requirements, as it is currently confidential and not yet finalised.”
Many market commentators have drawn parallels between
PPC and platinum miner Lonmin, who also called on its shareholders to bail it out of its precarious debt debacle. Last year, the world’s third-largest platinum miner raised about US$400m, similar to the amount being sought by PPC.
Lonmin paid a total $38m in underwriting fees to Standard Bank, JP Morgan Cazenove, and HSBC, which mopped up the remaining 30% of shares that were not taken up by stakeholders. That’s almost 10% of the gross proceeds. Lonmin’s underwriters effectively own 3.85% of the mining company.
But unlike Lonmin, which was loss-making at the time, PPC is profitable. In the six months to March, PPC delivered a 25% increase in profit, to R351m, even as cement sales dipped slightly. PPC recorded positive cash flow of R813m, which was lower than the R1,140bn the previous year because of the R1.75bn it had to pay its noteholders.
Its operating margin of 16.2%, which is on par with that of Afrimat, is regarded as healthy in the building materials business. So PPC’s profitable position may lessen the severity of the fee of whoever chooses to lend it a financial hand.
A source close to PPC hinted that the fee could be in the region of 3% to 4% of the total gross amount to be raised.
Irrespective of the fees PPC ends up forking out to its underwriters, the proposed rights issue is at present the only hope the cement maker has to lower its debt, which it expects to peak at between R10 and R12bn in 2017.
PPC intends to increase the number of authorised shares in issue from 700-million to 10-billion.
The proceeds of the proposed capital raising will bring present debt levels down to about R5bn, providing much-needed relief to the balance sheet.
It will also give the company breathing room to focus on its four capital-intensive projects in the rest of Africa.
PPC hopes to use 40% of its revenue by 2017 to offset lower sales in SA’s tightly competitive cement market.
In the past two years Mamba Cement and Sephaku Cement entered the domestic market. Together these companies have added an additional 3-million tonnes to the cement market, further aggravating the supply glut, since large infrastructure projects requiring heavy cement usage have been slow to come on stream. The additional cement production excludes what has been imported from Pakistan, and more recently China.
Last year, PPC commissioned its greenfield cement plant in Rwanda. Next in line are plants in Zimbabwe, the Democratic Republic of Congo and Ethiopia, which PPC hopes to commission in the next 12 months.
These four plants are expected to increase the group’s gross cement capacity by an annual 3-million tonnes.
Though the rights issue is expected to address PPC’s short-term funding risk, some analysts don’t believe it will curtail long-term headwinds sufficiently. “The rights offer does not address the long-term risks of threats from domestic competition and imports as well as the viability and longevity of some of [PPC’s] investments in Africa,” says Alpha Wealth small caps analyst Keith McLachlan.
He says PPC’s biggest problem is that it was slow to react to headwinds, particularly the threat from competitors.
“Combine this with a high-debt profile and a volatile management structure, and PPC is just a melting pot of risk,” says McLachlan.
Another commentator who chose to remain anonymous does not agree with PPC’s approach to expand on the continent. He describes the act of building four different plants in four different countries simultaneously as “suicide” that will undoubtedly attract “extra school fees”.
“If you consider what is going on in Zimbabwe right now, how long will it take before the R5bn debt starts running up again?” the commentator asks.