The Sunday Mail
l Zamco to buy US$88m debt from 8 distressed firms
l Discussions with 10 other companies underway
l Zamco to be discontinued after 10 years
THE Zimbabwe Asset Management Company, a special purpose vehicle that was created by the Reserve Bank of Zimbabwe with a specific brief to buy non-performing loans from banks, is set to acquire bad debts worth $88 million from eight stressed companies as part of a broadened mandate to rescue firms that have the potential to be rehabilitated, it has been established.
In essence, the intervention is meant to nurse companies than can operate viably but are being dragged by debt.
Most local companies are battling monstrous debts that are generally a direct result of the high interest rates levied by banks.
After the introduction of the multicurrency system in February 2009, many financial institutions charged relatively high interest rates, which at times were as high as 30 percent as they claimed that more than 90 percent of their deposit stock was short-term or transitory.
The lagging effects of the high interest charges are beginning to take a toll, with rising finance costs chewing the revenues of most companies and driving them in the red.
In July, the RBZ deliberately decided to extend the relief to both private and public companies in order to complement efforts that are being made by Government through the Distressed Industries and Marginalised Areas Fund (Dimaf), which falls under the Ministry of Industry and Commerce.
Dimaf was launched in October 2011 under a US$40 million facility through which Government availed $10 million, while the remainder came from insurance giant Old Mutual’s banking unit, CABS.
So in addition to acquiring NPLs worth US$157 million from banks as at the end of August 2015, Zamco was also pursuing a separate initiative to provide debt relief to companies outside the banking sector.
After acquiring the debts, Zamco will restructure them to ensure that they become manageable.
Zamco acting chief executive officer, Dr Cosmas Kanhai told The Sunday Mail Business last week that the company has since finalised transactions with eight companies, while active discussions have begun with 10 more firms.
“It’s now no longer four companies, they are now eight companies (we are engaging). So we have actually finalised those transactions.
“What is now left is just the signing of the respective agreements with the respective companies in terms of the structures we are putting in place for them to be able to turnaround.
“Total value of those NPLs is almost US$87,5 million for those eight companies. So we expect to be signing those agreements very soon because everything has now been completed and finalised.
“Once we have signed the agreements, then they are implemented because remember, some of them are loans, some of them are structures so they need to be signed because there will be new structures. They need to get appropriate approvals from their shareholders and from their boards then we sign the consummation,” explained Dr Kanhai.
He however cautioned that there will not be any wholesale acquisition of debt as the exercise will only the limited to debts that “meet specific criteria”.
It is believed that debt relief will be provided for loans that have been secured by mortgage bond through residential, industrial and commercial properties.
Cottco and RioZim could be covered
By last week, the identity of the eight companies could not be established as the authorities claimed that some of them were listed entities whose details cannot be communicated to the market before their shareholders were briefed.
Market rumour however suggested that struggling firms such as Cottco and RioZim, particularly its gold producing units, could be part of the arrangement.
In its recent interim financial results for the half year ended June 30, 2015, RioZim indicated that it had paid more than $4,7 million in interest repayments for loans, which was 65 percent of the resource company’s net loss of $7 million.
RioZim has been grappling with debt in the past three years.
In 2012, the mining firm defaulted on its debt repayment to banks.
At the time it owed banks and suppliers more than $60 million.
By June last year, its debt stood at $50,8 million.
RioZim’s board chairman, Mr Lovemore Chihota said in a statement accompanying the company’s half-year financials its huge debts were going to be restructured.
“A debt restructuring exercise is being pursued which may cause the Group’s debt restructured from short term to long term at a lower cost. Over the past few years the Group’s fortunes have been overshadowed by bank debt which may be due to high interest costs, has remained stagnant, regardless of significant payments,” explained Mr Chihota.
The performance of its gold producing units Renco Mine and the recently reopened Cam&Motor, which produced a combined 468 kilogrammes of gold in the six months to June 30, 2015, has raised expectations that it will be eligible for the facility.
But Zamco says it has specific guidelines that it follows that include an in-depth evaluation of the “peculiarities of the company” before proffering a solution.
Added Dr Kanhai: “There are two things that we can do. We can either restructure the loan – where the company was being charged 35 percent or 40 percent by banks, we may reduce the figure to 10 percent and 6 percent, so that will be massive savings in terms of the finance costs of the company, and we are saying that massive saving should also assist the company in turning around.
“One of the companies we are working with, if we finalise the restructuring aspect, it will have savings of $5 million annually in terms of finance costs. So that is one way we can assist a company to have breathing space.”
Also, through Zamco’s intervention, the loan tenure can be extended to between five and eight years from the current tenure of nine months or one year that is being stipulated by banks.
Such a debt restructure is envisaged to give companies more breathing space.
“So those measures may assist that company to use those savings to generate revenue and to be able to turnaround because the idea is to ensure that companies don’t close unnecessarily because of finance costs; and we help them in preserving employment and help the economy of the country,” explained Dr Kanhai.
In cases where the debt-afflicted company does not necessarily need a loan to boost operations, Zamco is considering the option of converting the debt that it would have acquired into shares – either preference shares or ordinary shares.
Preference shares are those that are accorded a high priority in cases where the business becomes insolvent. They do not come with voting rights and can be converted to ordinary shares.
However, ordinary shares or common shares, which ordinarily have a lower priority over company assets, are generally entitled one vote per share.
Zamco, therefore, is interested in becoming part owners in some of the companies.
It is also believed that converting ordinary debt into preference shares will have the added advantage of reducing the finance costs of the affected companies as preference shares generally have a lower coupon rate – normally between 6 percent and 10 percent – than ordinary debt, whose interest rates are being levied between 20 percent and 30 percent per annum by banks.
Experts say massaging the balance sheets of debt-laden companies will naturally prevent them from foreclosing.
Intervention not quasi-fiscal
Although there has been concern that by acquiring debts of private companies the RBZ could be dabbling in quasi-fiscal operations, Dr Kanhai noted that its current operations fall well within the scope of the core business of the central bank in as far as ensuring banking sector stability is concerned.
“I think those two aspects are different; the major mandate of the RBZ is to ensure the stability of the banking sector and addressing banking sector stability means addressing the major problem which is NPLs.
“Buy performing this function, it (RBZ) is performing its core mandate of ensuring the stability of the banking sector. And it is not something that is unique to Zimbabwe, all central banks that had similar problems of high NPLs had to come up with these NPLs to assist banks.
“So it is not a quasi-fiscal activity per se because Zamco is a separate company and the funding is not being done by the RBZ, the funding is done by the Government.
“You must also note that it is one of the many ways that are being put in place to ensure that NPLs do not recur because if we don’t address NPLs now, they may recur,” explained Dr Kanhai.
Banks also provided succour
In the same way that the RBZ is releasing companies from the clutches of vicious debt traps, the apex banks is also cleaning toxic debts from banks’ balance sheets.
It is widely expected that cleaning the balance sheet of affected banks will help them play their intermediary role in the economy.
Although, the ratio of non-performing loans (NPLs) to totals loans advanced to the market peaked to 20,5 percent in June 2014, the ratio has begun to drop.
The international benchmark that is considered ideal for NPLs is 5 percent, which the RBZ is targeting.
By the end of August this year, NPLs worth $157 million had been acquired from banks.
Zamco is actually targeting the top 100 NPLs amounting to about $188 million across the banking sector on a willing-buyer willing-seller basis.
Again, the company will evaluate the NPLs based on “supply and eligibility” of the loans.
The value of some of the loans will be discounted mainly depending on the assessment that would have been made.
For example, a loan with a book value of $500 000 could potentially be discounted by 20 percent or 25 percent, which means the bank would get 75 cents and 80 cents on the dollar for the non-performing.
Essentially, the bank will balance its books in two ways – it will remove a risk weighted asset, which means the bank’s capital adequacy will be improved and secondly, when Zamco acquires NPLs from banks, it uses Treasury Bills because of liquidity constraints.
The bank will have therefore have a performing asset that earns a coupon of 5 percent every half year.
The TBs can also be used as collateral when a bank is looking for liquidity.
Zamco to be discountinued after a decade
It has since been established that Zamco will only exist for a period of 10 years in order to prevent a situation where players in the financial service sector might become overly comfortable by recklessly extending loans with the assurance that when they do not perform, they will be taken up by the company.
A number of countries such as Malaysia, Nigeria, Kuwait, Taiwan and Ireland have created SPVs that acquire bad loans to free companies’ balance sheets.
Before starting its operations, Zamco got technical assistance from the International Monetary Fund (IMF) to ensure its operations conformed to international best practice.
The creation of a credit reference bureau, which is currently underway, is expected to provide a sustainable platform to prevent NPLs