Debt de­mo­li­tion ball

Banks al­legedly ask big fees to un­der­write PPC’s cap­i­tal rais­ing,

Financial Mail - Investors Monthly - - Front Page - writes Fifi Peters

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.

Pic­ture: iSTOCK

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