Downgrade raises PPC’s bailout target for investors

PPC’s downgrade this week brings to a head nearly two years of woes stemming from dwindling building activity, competition from cheap cement imports, rocketing debt and unceremonious boardroom relations that led to the appointment of a new CEO.

Concerned about the cement company’s mounting debt and ability to generate cash in a subdued construction market, S&P Global Ratings slashed its longand short-term credit rating to seven levels below investment grade.

S&P also placed the company’s long-term credit rating on negative watch, meaning another downgrade is likely.

The downgrade means it will cost PPC more to borrow the money it needs to lower its debt, which it expects to peak at R10-billion to R12-billion in financial 2017. PPC’s current R8.9-billion debt pile is the equivalent of about half its market value.

Two weeks ago, PPC approached shareholders to bail it out in a rights issue on June 14.

Initially, the company said it planned to raise between R3-billion and R4-billion, mainly to fund its Africa expansion strategy, which is costing more than planned, and pay down debt.

But the downgrade has raised the target to more than R4-billion as it now has to make extra provision for bond investors who may no longer wish to bear the burden of its debt. It could cost R1.7-billion plus interest if all bond investors redeemed their notes, PPC said.

Like most cement firms, PPC’s fortunes are tied to the economy and the rate at which it grows. South Africa’s economy has been struggling to gain traction in recent years as electricity shortages, low infrastructure spend and depressed business and consumer confidence weigh on its prospects.

The local cement industry was also hurt by the deluge of the building material from Pakistan, where producers are subsidised. This was addressed last year when South Africa placed import duties on Pakistani cement.

PPC said in a five-month operational update that cement imports from Pakistan had dropped 62% year on year in the fourth quarter of last year. But domestic cement sales rose only 2%.

It has been nearly two years since Ketso Gordhan’s sudden resignation as CEO due to irreconcilable differences with chief financial officer Tryphosa Ramano.

The boardroom spat created uncertainties, particularly on PPC’s strategy to expand into Africa. But these were laid to rest with the reconstitution of the board and the appointment of Darryll Castle as CEO in January last year.

Castle and his board were tasked with giving pace to PPC’s Africa expansion strategy. It commissioned its 600 000-ton cement plant in Rwanda last year and is finalising plans for plants in the Democratic Republic of Congo, Ethiopia and Zimbabwe.

But it needs more funding to successfully meet targets.

“Going to Africa was the best thing PPC could do,” said Sibonginkosi Nyanga, an analyst at Momentum SP Reid Securities. “But it was supposed to be done in a measured way, not amassing debt that is twice market value.”

An analyst who declined to be named said it was unfair to blame the present board for the “mess” PPC was in. “A lot of the issues that still need ironing out were inherited. It’s a work in progress. Sometimes things need to get worse before they get better.”

A lot of the issues that still need ironing out were inherited