Happiness Zengeni My Two Cents—
IT had to take Econet Wireless Zimbabwe or rather Zimbabwe Stock Exchange chief executive Alban Chirume to bring this column back after an almost two year hiatus. No doubt, 2017 has started off livelier than was the norm with all new years and there are expectations of better economic growth (mainly because the heavens have smiled on us).
The Herald Business is currently re-organising to make this section of the paper more informative and to accurately give insight into business and economic activities.
All our business reporters now have columns which touch on the major sectors of the economy. On Mondays we have Bumper Harvest with Conrad Mwanawashe which as the name suggests will touch on agriculture with a view to promote Government initiatives to ensure food self sufficiency. Of course Bumper Harvest forms part of what has come to be known as ‘Heraldese’ lingo as it is a yearly cliché – Zim braces for bumper harvest, Bumper crop harvest forecast.
On Tuesdays Tinashe Makichi will introduce a column dedicated to the resource sector; Mining Matrix. The main focus would be to interrogate issues in the mining sector and providing solutions on what needs to be done.
Golden Sibanda will take us through Corporate Briefs on Wednesdays while Thursdays will feature Enacy Mapakame’s Bulls & Bears, which focuses primarily on the stock market.
We also welcome contributions from willing individuals and companies.
The main news in the financial market space this week has been Econet’s proposed $130 million capital raising programme. In a circular released on Tuesday, Econet informed shareholders of its intention to raise $130 million through a rights issue and linked debentures scheme in order to pay off its foreign debt but want shareholders to follow their rights by directly depositing into a Standard Chartered London account held by Afreximbank.
Shareholders shall be offered, pro rata to their shareholdings 1 082 088 944 ordinary shares plus 263 050 614 Class A shares at a subscription price of 5c each on the basis of circa 82 ordinary shares for every 100 shares already held under a rights issue. Each shall be linked to a redeemable debenture with an issue price of 4,665c each at a coupon rate of 5 percent per annum, payable upon redemption and a redemption value of 6,252c each inclusive of the cumulative interest coupon for the 6-year period.
According to the group, the rights offer shares are priced at a discount to market in order to provide an incentive for members to invest capital into a deflationary and illiquid environment where it is extremely difficult to withdraw cash in United States dollars, or to make foreign payments. The linked debentures are being issued in order to mitigate the dilutive impact of the rights offer.
However, concerns have been raised and rightly so. Econet has an illustrious history since its formation but it equally has its fair share of scandals and controversies, particularly with regards its treatment of minority shareholders.
So here’s MY TWO CENTS
Econet’s problem highlights what most companies in Zimbabwe who have offshore debt are going through. Even Government is at present running around to clear $1,2 billion in arrears to multi-lateral lenders. It’s increasingly difficult for companies to service their hard currency debt mainly due to the situation with banks nostro balances. Sadly, the fiat money the country created, although trading at 1:1 with the US dollar on the local market, cannot be used to make international payments and therefore, as the ratio of local RTGS US dollars increase, while real US dollars in local bank nostro accounts decrease, the resultant effect in a country with a high affinity to import, can only mean challenges in making international payments. Not being able to repay may make the crisis deeper, more contagious and generally more difficult to manage.
The International Monetary Fund has forecast that, in the next 12 to 18 months, about 60 percent of commodity exporters face an elevated risk of encountering financial sector stresses as slower growth and exchange rate adjustments convert into debt service difficulties for borrowers.
Zimbabwe’s financial woes have resulted in manufacturers of strategic products experiencing difficulties in timeously getting enough hard currency to import critical raw materials. Already, companies in sectors such as oil expressing, motor assembly and fertiliser manufacturing have raised a red flag. Shortages are already being experienced in the fertiliser industry as the forex shortages take toll.
But with regards the proposed rights issue, herein lies the problem: If Econet Wireless Zimbabwe gets regulatory approval, then money in the banking system, which is denoted in US dollars, or what we are made to believe is equal to US dollars, is in reality effectively not US dollars. Approving it would be public admission which adds to a loss of confidence in the monetary system. Some analysts are even going as far as to calculate an exchange rate based on the formula Econet used for its rights issue. Already as has been reported before, there is a thriving gray market for cash at differing rates (around 14-18 percent at current) and official endorsement would set a bad precedence in the economy.
The truth is Zimbabwe needs a solution to its currency crisis before everything boils over. In a report moved elsewhere, the International Monetary Fund was quoted as saying Zimbabwe needs strong policy action to reduce the budget deficit; accelerate structural reforms; and re-engage with the international community to access much needed financial support as its liquidity shortage is due to an unfinanced external position that reflects an expansionary policy and product un-competitiveness. It’s also due to unchecked externalisation, which some companies have in the past been implicated in.
So in essence, Econet, just like any other business with offshore debt, is in a dilemma but surely the transaction could have been structured differently.
There are concerns that have been raised across the market. The fact that the foreign payment structure, the group is proposing, prohibits participation by local investors and ultimately will result in huge dilution at a massively discounted price. Who came up with that valuation anyway? Perhaps the underwriting agreement could have been better negotiated to cover funds deposited locally . . . ie Econet Global advances the money then receives money from a designated local bank as they are allocated forex by the RBZ; that way local shareholders are better placed to follow their rights. The same minorities supported this company when it held its IPO decades ago and these are the same people that are about to be screwed over.
Further if the transaction is approved, how would payments be classified under the current RBZ priority list. At present loan repayments are under Priority 1 but then investments outside the country – because that is what this rights issue is – fall in the last tier. There is need for further clarity when Econet gets its Exchange Control approvals
In any case, forex shortages have been with us since last year, wouldn’t it have made sense for Econet to get in the queue and wait for its turn. It’s not as if ultimately foreign payments are not being made, there is just a waiting period. Econet should have gone in the queue last year for the loans that are due in April, July and December this year, rather than transferring the burden to shareholders. The other loans are due in 2018 and 2019 respectively and therefore not urgent enough to warrant a capital call. And if we want to be extreme with political undertones, we can also add that how does this transaction benefit a country, which is trying to preserve and grow the little foreign currency it has? Should pension fund money be used to make loan repayments?
A guarantor is, according to the definition provided by Wikipedia, a person who agrees to repay the borrower’s debt should he or she default on agreed repayments. In this case Econet Global, the guarantor has been getting 6 percent guarantee fees (read as externalisation) over the past years that the group has held this syndicated facility. A rough calculation would show that Global has been paid over $100 million already and yet the same cannot step up to provide forex and help its subsidiary. On top of that Global will be paid 2 percent in underwriting fees and have an opportunity to increase their shareholding at a massive discount. Who is Econet Global anyway? Is it a foreign company? Is it the same company that has been merrily doing share buy backs and now playing around with the Class A shares which it exclusively holds? And while still at it perhaps we should ask what happened to Econet Trust?
Then there is the man who runs the ZSE! He has been caught offside on a number of occasions. But that’s a story for another day!
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