Concerns that the funded portion of the Sasol Inzalo BBBEE scheme was suffocating under a pile of debt were heavily represented during the annual general meeting of the scheme held at the Turbine Hall in Johannesburg on Saturday. So much so that the directors of both Sasol Inzalo scheme and of Sasol Group unveiled that there were talks to ease the debt pressure.
During question time, one theme kept coming back from investors. The Debt!
One shareholder took things too far in asking a question to this effect: Seeing that Sasol Inzalo is a BEE scheme why is government not giving us these shares for free?
Another shareholder quizzed: Is there anything that Sasol can do to help the scheme from its debt?
And a couple of shareholders made a plea to Sasol to intervene. But one other was forceful in juxtaposing the Sasol Inzalo debt to the matter of the Sasol CEO salary. News that the earnings of Sasol CEO David Constable have risen from R32m in 2012 to R53.6m in 2013 have not gone down well. The shareholder said when seen against the Sasol Inzalo debt situation Constable’s earnings do not make for a good picture.
The funded Sasol Inzalo BBBEE scheme is apparently suffering under a pile of debt put in place at inception in 2008. Black people and groups were invited to buy into an instrument that captured Sasol shares for R366 per share. The targeted beneficiary of the scheme were subsidised through debt. They only paid between R18.30 and R36.60 for an instrument that was going at the Sasol ordinary share. The balance was funded through debt and mainly preference shares. As always, the idea behind this structure is that the instrument held by the BEE beneficiaries will earn equity in time via appreciation of the share price and servicing of debt via dividend.
As it turns out the Sasol Inzalo debt is proving too heavy to be significantly diluted by the share price and dividend flow. Directors of Sasol and those of Sasol Inzalo were united in pointing out that the cost of debt is a bit heavy. These directors include Sasol Group director Nolitha Fakude and two Sasol Inzalo directors Khungeka Njobe and Thandeka Zondi. They attributed this to timing. Interest rates were high at the time the scheme was put together. This means the funders of the scheme locked in high interest rates in line with cost of debt of 2008. While South African interest rates have declined significantly since then the funders continue to rake in income based on 2008 rates. It’s a nice position to be in if you are a financier of the Sasol Inzalo scheme.
Not so good news if you are one of the more than 200000 beneficiaries of the Sasol scheme. The result is reflected in the financials for the year ended 2013.
The complex Sasol Inzalo formation reported total income of R389m (dividend from Sasol) in the year ended 30 June 2013. This income was applied on expenses being:
- Agency fee payable to the Standard Bank of Southern Africa of R1 million
- Audit fees of R131 862
- Finance expenses comprising interest on the long-term debt of R562 million
As such the scheme ended the year with a net loss of R174 million (2012: R273 million).
The financial position has improved but remains in the red by R80 million. The financial position is explained in the Sasol Inzalo financials thus:
“The investment of the 16 085 199 Sasol Preferred Ordinary shares was revalued at the closing market price of R431,54 (2012: R342,40) per Sasol Limited ordinary share as at 30 June 2013, to a value of R6 942 million (2012: R5 508 million)…”
The value of the investment in Sasol Limited is R1 055 million higher (2012: R379 million lower) than the cost price of R5 887 million. A deferred tax liability to the value of R196 million (2012: R71 million (deferred tax asset)) is recognised relating to the revaluation. The net balance on the investment fair value reserve amounts to R859 million (2012: R308 million negative).”
The balance of the long-term and short-term debt amounts to R6 882 million (2012: R6 677 million). In terms of the ﬁnancing agreement entered into with the preference share funders, 50% of the A Preference shares will be redeemed over the ﬁnancial years 2009 to 2019. The balance of the A, B, C and D Preferences shares will be redeemed in full at the end of the empowerment period out of the proceeds from the sale of the Sasol Preferred Ordinary shares.”
The negative shareholders’ equity of R80 million (2012: R1 073 million) consists of an accumulated loss of R1 310 million (2012: R1 136 million), a positive fair value reserve of R859 million (2012: R308 million negative) and share capital of R371 million.”
Clearly something has to give for this scheme to deliver considerable value at maturity. Either the Sasol share price runs very hard or Sasol and the funders of the scheme must make a plan.