Tag: debt

Retrenchments loom at SAA

Source: eNCA

South African Airways (SAA) has informed its more than 5,000 employees that it’s restructuring. It is estimated that about 944 staff will be affected – nearly 20% of the workforce.

The national carrier has had its fair share of financial turbulence.

But in the mid-term budget, Finance Minister Tito Mboweni announced that the state would pay off the airline’s R9.2-billion debt over the next three years.

The airline has incurred over R28-billion in cumulative losses over the past 13 years.

By Renee Bonorchis and Colleen Goko for Fin24

Investors are prepared for the worst as the day of reckoning looms for Eskom, the state-owned power utility seen by Goldman Sachs Group Inc as the biggest threat to the country’s economy.

Yields on benchmark South African government notes are at their highest in three weeks, trumped only by junk-rated Nigeria, Turkey and Lebanon among 29 major emerging markets. Rand-denominated sovereign debt has lost 3% for dollar investors this half, the worst performance after Colombia and Argentina. Foreigners have dumped a net R25 billion of the country’s bonds this year, cutting their holdings to 37% of the total, from 43% less than 18 months ago.

The rand has weakened 4.6% in the half to date, and is among the five worst-performing developing-nation currencies versus the dollar. Speculative long-rand contracts retreated to the lowest level in more than three months last week, Commodity Futures Trading Commission data show. When it comes to the cost of insuring South Africa’s debt against default, only Turkey and Argentina are more expensive.

Eskom, which supplies about 95% of the country’s power, has R450-billion of debt and is surviving on state bailouts after massive cost overruns at two partially completed coal-fired power plants. The country endured four days of controlled blackouts last week to prevent total collapse of the grid. Power shortages and policy uncertainty have damped economic growth and plunged business confidence to multi-decade lows as investors await the government’s turnaround plan for the utility.

“These outages threaten South Africa’s fragile growth profile,” Siobhan Redford, a Johannesburg-based analyst at Firstrand, said in a client note. “Clarity and certainty on plans for Eskom – both in terms of financing needs and returning to a more sustainable power generation profile – are vital in boosting the confidence of both domestic and offshore investors.”

South Africa will “soon” announce the appointment of a permanent chief executive officer for the utility and “shortly” release a special paper on the path the CEO and a strengthened board should take, President Cyril Ramaphosa said in a statement on Monday, in which he described Eskom’s financial situation as “untenable.”

“The sheer scale of Eskom’s debt is daunting,” Ramaphosa said. “Further bailouts are putting pressure on an already constrained fiscus.”

The bailouts will probably widen South Africa’s budget deficit to the biggest since the financial crisis, threatening the country’s last remaining investment-grade credit rating at Moody’s Investors Service, according to a Bloomberg survey of economists. Moody’s is scheduled to review the assessment on Nov. 1, days after the mid-term budget is presented to lawmakers.

A risk premium was priced in to the rand and local debt partly due to weak economic fundamentals and uncertainty on the future of Eskom, the medium-term budget policy statement and the credit assessment from Moody’s, said Elna Moolman, a Johannesburg-based economist at Standard Bank Group Ltd.

Last week, the government published its latest Integrated Resource Plan, which maps out the energy mix for the next decade. It includes a switch to more green energy as the country, which sources most of its electricity from coal, faces pressure to meet emissions-reduction targets.

South Africa will develop a framework to take aging coal-fired plants out of service, Ramaphosa said. While this will present challenges for communities and workers where fossil fuel-powered energy generation takes place, “it also presents opportunities for those affected to have access to technologies that are more cost-effective and better for human health.”

Will China Mobile buy a struggling Cell C?

According to a recent report by ITWeb, struggling telco Cell C is in possible buy-out talks with China Mobile.

It is rumoured negotiations are underway, and the company told ITWeb that it “is willing to talk to anyone wanting to stabilise the company”.

China Mobile has been pursuing expansion in Africa for some time. A year ago, the world’s largest carrier opened its South African office in Johannesburg.

However, Cell C CEO Douglas Craigie Stevenson reported told ITWeb that Cell C is not considering a merger.

Summary of the situation

  • Last month Cell C reported a loss of R8-billion
  • Top bosses have reiterated that the company is open to any potential buyers
  • Blue Label Telecoms, who owns 45% of the telco, says they do not know whether their shareholding will be maintained or reduced
  • Other Cell C shareholders include 3C Telecommunications with 30%; Net1, which owns 15%; while 10% is held by Cell C management and staff
  • Reasons for Cell C’s debt include freezing jobs, declining revenue, debt management challenges and three downgrades by rating agency Standard & Poor

 

Source: Supermarket & Retailer

South Africans are truly struggling financially and are prioritising their monthly debt repayments as they battle to make ends meet.

This is according to Debt Rescue CEO, Neil Roets, who said that consumers typically prioritise debt repayments for their homes and cars as these are assets that they do not want to lose to repossession.

However, these repayments also usually have the highest instalment amounts, so keeping them up to date just adds to the financial burdens embattled consumers are already facing, he said.

Roets added that consumers are cutting down on a number of purchases to keep up on their expenses.

“We have seen a lot of belt-tightening happening over the past year, so consumers have started cutting down on many expenses,” he said.

“Most luxury expenses have been foregone, and purchases such as dining out and takeouts are no longer part of budgets, to keep up with debt repayments and put food on the table.

Consumers typically prioritise debt repayments for their homes and cars as these are assets that they do not want to lose to repossession.

However, these repayments also usually have the highest instalment amounts, so keeping them up to date just adds to the financial burdens embattled consumers are already facing, he said.

Roets added that consumers are cutting down on a number of purchases to keep up on their expenses.

“We have seen a lot of belt-tightening happening over the past year, so consumers have started cutting down on many expenses,” he said.

“Most luxury expenses have been foregone, and purchases such as dining out and takeouts are no longer part of budgets, to keep up with debt repayments and put food on the table.

“Many consumers are resorting to credit in the form of store cards, credit cards or payday loans to put food on the table.”

Roets said this was of great concern as it shows that South Africans are taking on debt to cover day-to-day expenses.

“Day-to-day expenses that consumers are taking debt for includes food, clothing, electricity and fuel for transport,” he said.

“But there are cases where people are taking up debt to repay other debt, or a new payday loan shortly after the previous one was repaid, placing them in an even larger debt spiral.”

Sandton Gautrain station still without water

By Kgomotso Modise for EWN

The City of Jo’burg said that the water supply would not be restored at the Gautrain station in Sandton until it received an R8-million payment from property company Cedar Park.

Water supply was cut off two weeks ago after the company apparently failed to pay municipal rates since 2013.

The matter was in the High Court on Friday and the property company has been given two weeks to make a payment.

Joburg Mayor Herman Mashaba said the city could not give Cedar Park preferential treatment.

“We’ve got our residents out there who are financially suppressed, we don’t know why the previous administration made such a deal with Cedar Park.”

 

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

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