Tag: debt

Eskom forced to go into debt to pay interest

By Jan Cronje for Fin24

Cash-strapped power utility Eskom is needing to borrow money in order to pay interest on debt, its chairperson and interim CEO Jabu Mabuza told MPs.

Eskom leadership, together with Minister of Public Enterprises Pravin Gordhan, were briefing a joint sitting of three oversight committees on the utility’s finances on Tuesday.

Mabuza, who took over the role of interim CEO after Phakamani Hadebe resigned at the end of July, said the utility found itself in an unsustainable position. Its total debt was nearing R450bn, and it was not earning sufficient revenues from its businesses to service the interest on what it had borrowed.

“We find ourselves having to borrow to pay debt,” he said.

Electricity revenues over the past 5 years had been flat, he said, while operating costs had increased. Annual tariff increases, meanwhile, were less than what it had hoped for. He said Eskom was also owed some R38bn that it has not been able to collect.

Mabuza told committee members that the energy availability factor of its power plants had dropped to below 70%, which in turn had contributed to load shedding.

Gordhan told committee members Eskom would have run out of money by October without government support.

The utility has been granted two lifelines by the state. The first is a financial lifeline of R23bn per year (for three years) announced by Finance Minister Tito Mboweni in his February Budget. The second is a Special Appropriations Bill which allocates the utility R26bn for the 2019/20, and R33bn for the 2020/21.

What is going on at WeWork?

By Annie Palmer for CNBC 

WeWork released its much-anticipated S-1 filing to go public earlier this week.

The filing lays the groundwork for what is widely expected to be one of the largest IPOs of the year, but also details the myriad risks WeWork is likely to face once it goes public.

Accelerating losses, expensive lease agreements and CEO Adam Neumann’s complex relationship at the company are among the risks it faces.

WeWork’s parent company, the We Company, made a splash earlier this week with the release of its much-anticipated IPO prospectus.

The company’s S-1 lays the groundwork for what is widely expected to be one of the largest initial public offerings of the year, second only to Uber’s IPO in May.

It’s also filled with unusual items that should scare off all but the hardiest investors with a healthy appetite for risk.

Here’s a rundown:

Mounting losses
WeWork’s revenue for the first half of 2019 may have been more than double that of a year earlier, but its losses are accelerating just as rapidly. The company indicated in its IPO filing that losses ballooned to more than $900 million in the first six months of the year, which follows full-year net losses of $1.9 billion in 2018.

Massive losses have become part and parcel of unicorn IPOs, as demonstrated by the debut of fellow high-flying tech companies Uber and Lyft earlier this year, among many others. But WeWork continues to face tough questions around the sustainability of its business and few of them were answered in its S-1.

“You can say I’m growing faster, but you can’t say that if for every dollar you’re getting, you’re losing a dollar,” said Renaissance Capital principal Kathleen Smith.

Similarly, MKM Partners’ Rohit Kulkarni said in a note Friday that investors would “have to take a big leap of faith in order to believe that WeWork would show signs of a sustainable economic model” given the rising costs across its 528 locations. He said WeWork could soon find itself strapped for cash.

“At an estimated $1500-200mn in cash burn per month, we believe the company has about six months in execution runway ahead before facing a cash crunch,” Kulkarni wrote in a research note.

The company signs long-term leases with landlords that last up to 15 years, which requires it to pay hundreds of millions of dollars in future rent, according to data provider CB Insights. In the S-1 filing, WeWork said future lease payment obligations were $47.2 billion as of June 30, up from roughly $34 billion at the end of 2018.

At the same time, WeWork offers short-term rental contracts to members, in an effort to provide flexibility, collecting rent at an average of a two-year timeframe, Smith said.

This is a boon for its members, but could present a risk to WeWork’s business, as these short-term renters could up and leave at any time, leaving the company on the hook for long-term rentals.

“That mismatch can be deadly in a recession,” Smith said. “It means the company has got to be able to pay the lease costs. If for some reason there’s price pressure, lack of renewals, cancellations and they have a time where they’re not leasing out their space, that could be a very huge risk in a recession.”

The company’s declining revenue per membership also raises some concerns.

WeWork estimates a total addressable market opportunity of $945 billion, when applying its average revenue per WeWork membership to its potential member population, the filing states. However, WeWork also warned that revenues per member will decline in the future as it expands internationally into “lower-priced markets.”

“Investors want to see [average revenue per member] increase, because that can prove this idea of ancillary services,” Smith said.

Services are expected to be a long-term driver of the company’s revenue. CEO Adam Neumann has stated previously that he sees WeWork as a “global platform” for things like “space-as-a-service,” a play on the phrase software-as-a-service.

If WeWork is already having trouble increasing its average revenue per member, it could be challenging to get members to shell out a couple extra dollars on things like software or other services.

Puzzling corporate structure and unpredictable China business
After WeWork rebranded to become The We Company in April, it adopted a complicated corporate structure, called an umbrella partnership corporation, or Up-C.

In effect, this turned WeWork into a limited liability company, with The We Company overseeing it and joint ventures in Asia, as well as other related entities, such as its fund ARK Capital Advisors, which oversees global real estate management and acquisitions. (The acronym stands for Adam, Rebekah and Kids, in reference to his wife — who’s listed as a co-founder and wields significant influence at the company — and their five children.)

This chart from the S-1 shows how complicated it all is:

The Up-C structure has tax benefits for Neumann and other executives, as they’ll be able to pay tax on any profits at an individual income-tax rate, according to the Financial Times. Meanwhile, public shareholders will be subject to double taxation, since the holding company will be taxed on income and investors will pay another tax on dividends.

In its S-1, WeWork said the Up-C structure would give it more flexibility to pursue acquisitions, while keeping debts and obligations of its other businesses separate.

“Such a structure allows us to separate our WeWork space-as-a-service offering from the rest of our existing businesses, and will also allow us to hold separately any future business areas into which we may expand,” the filing states.

Kulkarni said in an interview with CNBC that WeWork’s business in Asia is still in the early stages of development, so the structure allows them to “isolate the losses” associated with it.

In the company’s S-1, WeWork noted that its contribution margin, which is the revenue left from membership and services after subtracting operating expenses of those locations, would have been three percentage points higher if it had excluded the China business.

WeWork faces unique risks with its operations in China. Business in the region is run by groups it can’t control, local laws are different in terms of the length of leases and it falls under the 2017 China Cybersecurity Law, which gives the Chinese government access to enterprise data.

Kulkarni said he believes WeWork hasn’t provided “sufficient disclosures around how the China and Asia assets are held” and that its confusing corporate structure could potentially present significant risks.

“It’s a puzzle that needs to be solved,” Kulkarni said.

An all-male board of directors
The We Company disclosed who will serve on its board of directors in its IPO prospectus. Not a single woman will serve on the company’s seven-member board, which could potentially open it up to criticism later on down the line.

Neumann is chairman of the board and is joined by Bruce Dunlevie, a founding partner of Benchmark Capital, Ronald Fish, a vice chairman of WeWork’s biggest backer, SoftBank. Lewis Frankfort, Steven Langman, Mark Schwartz and John Zhao also serve as directors.

By appointing solely male directors, WeWork is bucking the larger trend toward gender inclusive boards. As of last month, every S&P 500 company had at least one female director on its board. Having a more-diverse board is widely viewed as an avenue toward better shareholder returns.

He controls the majority of the voting rights through the company’s class B and C shares, with both classes carrying 20 votes per share compared to class A shares, which have one vote per share. Neumann’s holdings could further increase as a result of a pre-IPO award option of up about 42.5 million shares, which will vest over the next 10 years.

Complicating things, WeWork leases and pays rent on buildings owned in part by Neumann. He has ownership stakes in four commercial properties leased to WeWork, the S-1 states. Between 2016 and June 2019, the company had paid $20.9 million to the landlords overseeing these leases, which in effect includes Neumann.

Additionally, when WeWork rebranded to become The We Company in April, it acquired the trademark to “We” from We Holdings LLC, an investment vehicle with Neumann and co-founder Miguel McKelvey. As part of the deal, We Holdings LLC got an additional stake in We worth $5.9 billion.

These kinds of transactions are things investors typically don’t like to see, Smith said.

So much of the company is riding on Neumann that he was included among the risks listed in WeWork’s S-1. The company noted that Neumann is “critical” to its operations, yet it has “no employment agreement in place.”

“If Adam does not continue to serve as our Chief Executive Officer, it could have a material adverse effect on our business,” the filing states.

Furthermore, should Neumann ever become permanently disabled or deceased, his wife Rebekah, who serves as the company’s chief brand and impact officer, is one of two other people who will choose his successor. If two preselected directors are no longer serving on the board, Rebekah can also select which board members will assist her in the selection process.

WeWork acknowledges in the S-1 that Neumann has “deep involvement in all aspects of the growth” of the company, adding that he has “proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator.”

Proposed debt relief bill could cost SA R20bn

The National Credit Amendment Bill was drawn up by the portfolio committee on trade and industry in the fifth parliament.

Should it be passed, this law would allow low-income workers to extract themselves from debt through debt restructuring if they earn a gross income of R7 500 or less per month, have unsecured debt of R50 000, or have been found to be critically indebted.

Economists, banks, financial institutions and businesses have all warned that this Bill could have dire, unintended consequences.

  • The ANC would effectively write off between R13- and R20-billion
  • The loans constitute property, which are enshrined in article 25 of the Constitution – so the Bill would contravene the Constitution
  • According to Moneyweb, there are approximately 9.4-million current borrowers who have unsecured debt of less than R50 000
  • The passing of the Bill may cause ratings agencies to downgrade the country again
  • The bill will increase the cost of credit for low income earners as financial institutions would tighten lending criteria to protect their interests
  • It will weaken the fight against illegal lenders
  • It will negatively disrupt the credit market while posing a financial risk to the state
  • Experts are advocating for debt counselling instead
  • Retrenched workers and low-wage earners – the people the Bill is aimed at – would ultimately not be able to receive a line of credit

Eskom is in a ‘death spiral’

This is a week that the beleaguered power utility would rather forget.

Net losses
Yesterday the state-owned enterprise posted net losses after tax of R20.7-billion.
These losses were due to:

  • Municipal debt rising to R20-billion
  • NERSA only granting a 5.23% tariff increase
  • Sales declining by 1.82%
  • Wage settlements with unions that were above inflation

Soweto residents demand flat fee
The residents of Soweto, who combined owe Eskom more than R18-billion in unpaid fees, have demanded that prices for unlimited electricity be capped at R100 for each resident:

  • Soweto residents demand that their debt be written off
  • Of the estimated residents in Soweto, Eskom currently supplies 135 000 with legally connected power
  • Only 12% (16 2200) of these customers pay for electricity
  • Debt from the area has risen from R3.6 billion in 2014 to its current level of R18-billion
  • Eskom is threatening to disconnect non-paying customers, remove illegal connections, and move more houses to prepaid electricity
  • Soweto residents are fighting back, launching Operation Khanyisa which sees trained local members illegally reconnecting houses for no charge

Kusile in crisis
Construction on the coal-fire power station Kusile began 11 years ago, in 2008. However, not one unit is currently working:

  • All six 800 MW generator units are offline
  • Five years behind schedule, only Unit 1 at Kusile has been handed over for commercial service
  • Units 2 and 3 are still undergoing testing and commissioning
  • Major design, execution and operational problems are being experienced

Load-shedding looms
Based on the factors mentioned above, a number of industry experts believe load-shedding will reappear towards the end of August:

  • Major issues with Eskom’s new power plants haven’t been resolved
  • Debt is mounting
  • Generation remains a massive challenge for Eskom, and capacity is limited
  • Operational issues have not been addressed

 

Cell C is in severe financial trouble

According to a recent MyBroadband article, Cell C is in deep financial trouble, and was “forced to delay its debt payments and hire consultants to probe its business practices”.

Cell C’s interim CEO, Douglas Craigie Stevenson, wrote an open letter detailing the challenges faced by the company. The letter included a turnaround strategy, aimed at “extracting greater value from its roaming agreement and optimising its network revenue and usage”. A recapitalisation programme is also on the cards.

Bowmans Attorneys have been hired to “investigate any parts of the business where we suspect that there may be irregular business practices”.

A sharp decline in Cell C shareholder Blue Label Telecoms’ share price followed this announcement.

According to MyBroadband, they have “received information from industry insiders saying Cell C is facing tremendous financial challenges which are big enough to bankrupt the company”, with some speculating the company may “close down and have its parts sold off”.

According to Stevenson’s open letter, the challenges faced are the following:

  • Debt – this has gone up more than anticipated since the recapitalisation of 2017
  • The cost of debt – Cell C is paying a substantial premium on the cost of its debt
  • Liquidity problems – this is due to some of the events around the payment of large tranches on coupons
  • Poor business performance – Cell C’s business performance has not been optimal

Industry insiders told MyBroadband that Cell C is in this position because of:

  • High interconnect rates – the interconnect rate went from 20c to R1.25 before Cell C’s launch, which made it nearly impossible to compete
  • Bad management and shareholders – the company was not run efficiently enough to become successful
  • Declining voice revenues – as data products become more popular, high-margin voice traffic is declining
  • High roaming charges – Cell C pays high roaming charges in areas where it does not have network coverage

Image credit: Tech Central

By Jenni Evans for News24

Johannesburg mayor Herman Mashaba is seeking an urgent meeting with the Eskom board over the power utility’s declaration that it will no longer do repairs in places illegally connected to the power grid.

This follows a meeting between Mashaba and Eskom officials on Monday to deal with complaints by Soweto residents about illegal electricity connections, vandalised infrastructure and extended blackouts.

“Due to the complex nature of the issues discussed between myself and the Eskom team, during a meeting at Megawatt Park, it was decided that it would be prudent to include the Eskom board in our deliberations,” said Mashaba in a statement.

“I have therefore requested an urgent meeting with the board of Eskom and its shareholder within the next 24 hours. The team at Eskom has indeed committed to ensuring this does take place.”

Mashaba felt it was important for the city and Eskom to work together to find solutions to issues faced by Sowetans and other residents affected by ongoing blackouts arising from Eksom’s credit management processes.

Last week Eskom threatened that it will not repair infrastructure in areas where there are illegal connections or the safety of staff cannot be guaranteed.

“Eskom will only restore supply to legal and paying customers in the areas, on condition that the community allows safe access to Eskom staff to conduct audits and remove illegal connections,” the statement said.

It was previously reported that Soweto has been ranked as one of the top defaulters in the country, where residents owe Eskom more than R17bn.

Mashaba said last week after Eskom’s warning that he felt compelled to intervene on behalf of residents who will be affected by the actions of a few.

Sanral suspends e-toll debt collection

Source: News24

The South African National Roads Agency has announced that it is suspending the process of pursuing e-toll debt.

This after Sanral’s board passed an urgent resolution on the matter on Tuesday.

“It resolved that given the initiative led by President Cyril Ramaphosa to address the e-tolls payment impasse, Sanral will, with immediate effect, suspend the process of pursuing e-toll debt. This includes historic debt and summonses applied for from 2015. No new summonses will be applied for,” Sanral spokesperson Vusi Mona said in a statement issued on Wednesday.

Sanral says the decision will be constantly monitored by the board and reviewed according to prevailing circumstances.

Netwerk24 had reported earlier this month that only 26 motorists had received default judgments so far for not paying their e-toll bills.

Mona told the News24 sister site that motorists owe Sanral more than R10.9-billion in unpaid e-toll money.

Zuma’s second term cost SA R470bn

President Jacob Zuma’s second term cost SA’s economy R470-billion, Nedbank chief economist Dennis Dykes told Business Day on Tuesday.

The former president is said to have cost SA the following during his second term:

  • R470bn of GDP stemming from corruption, maladministration and misguided policies
  • R140bn in estimated lost tax revenue
  • A subsequent reduction in the budget deficit in 2019 to about 2.4% of GDP (currently at a projected 4%)
  • A reduction in government debt to R250bn: less than 49% of GDP versus 56% of GDP
  • The South African economy could have been up to 30% (R1-trillion) larger
  • The economy could have created 2.5-million more jobs
  • The government could have collected R1-trillion more in tax
  • The government could have minimised Eskom’s debt, which is R419bn by comparison.

Source: IOL

As the festive season has kicked off in earnest and consumers spend more, FNB on Monday warned that approximately 56 percent of middle income consumers in South Africa spend all their monthly income in five days or less after receiving it.

This is according to data from FNB’s Retail segment, which categorises middle income consumers as those who earn a gross monthly income of between R7 000 up to R60 000.

Raj Makanjee, chief executive of FNB Retail, said that for many consumers it was not only a matter of living from one salary payment to another, the reality is that their monthly salary just does not last for 30 days.

Makanjee encouraged consumers to exercise financial discipline, saying that financial discipline was not dependent on having greater income but requires deliberate steps.

“These consumers tend to struggle with money management, with the shortfall leading to sacrifices in important areas such as having back up or emergency saving that can be used to pay for unforeseen expenses. High spending and limited savings cause consumers to rely on credit to get through the month, making them more vulnerable to be caught in a debt trap,” Makanjee said.

Christoph Nieuwoudt, chief executive of FNB Consumer, said more than half of consumers miss at least one debit order over a 12-month period, indicating the pressure consumers are under.

“For almost 40 percent of such customers, debt repayments make up more than half of their take-home-pay, which we consider to be very high. The main driver of this is large numbers of microlender loans and store cards that consumers take up. The ideal scenario for a consumer is to have one provider who gives them a transactional account and the right type of credit when needed,” Nieuwoudt said.

The bank said said it had also seen that 30 percent of middle income consumers who are saving, save for emergencies and at least one other longer-term goal.

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