From ‘perk’ to debt trap
The now-discouraged practice of lending workers money to buy shares has increased Resilient’s commercial risk
Until early January 2018, Resilient employees were laughing all the way to the bank. For years, the property company lent its workers loads of money to buy its own shares.
But with the sharp drop in the value of Resilient’s share price, employees’ life-enhancing profit on their share investment has turned into a life-destroying loss.
The debt on the 8.4m outstanding shares in the employees’ share purchase scheme is approximately R630m.
That wasn’t a problem when, by June 2017, this debt was comfortably covered by the shares, which were valued at just over R1bn. But at the end of March 2018 the value of the shares had slumped to R419m, about R210m short of the debt that’s owed.
These figures help explain why lending money to employees to buy shares has fallen out of favour. High-profile reports critical of Resilient, and released in January, touched on the possibility that the company used employee share purchasing to bump up the share price.
“In general it’s regarded as bad practice and it’s poor corporate governance,” says Pwc’s remuneration specialist Gerald Seegers, who also refers to the commercial risk. Seegers says it’s no longer common practice. By now employees of Resilient know just how bad a practice it is and also what a huge commercial risk it can be. They’re locked in to a debt trap of nightmarish proportions; if the Resilient share price doesn’t recover to at least R75 within the next few years they could find themselves working just to repay the loan on their share purchase scheme. Leaving the company for fresher debt-free pastures may not be an option as it’s likely to trigger repayment of any outstanding debts. Essentially, they would be realising the losses. The preferred option appears to be staying put and hoping desperately that the share price will recover.
But as one analyst remarked, staff who are technically bankrupt could present a risk in terms of behaviour and compliance. These