The $33.4 million Black Economic Empowerment (BEE) deal concluded by JSE listed property firm, Grit Real Estate Income Group, must be one of the most interesting BEE deals of our time, partly for coming with the Bank of America connection.
At first glance you would want to say BRAVO to the Bank of America for providing the $33.4 million (about R450 million) BEE funding to the beneficiaries of the deal. The beneficiaries are organised under a business called Their vehicle is called Drive in Trading and under the directorship of Yolanda Miya, Nomzamo Radebe, Neo Mokhobo, Sakhepi Mhlongo and Nchaupe Bright Laaka.
A closer look suggests that the Bank of America is set to enjoy a free ride on the back of BEE if this deal goes through. The Public Investment Corporation (PIC) has made the deal risk free for the Bank of America. Questions are being raised as to why the PIC would do such a thing in a deal that purchases foreign property.
While listed on the JSE, Grit Real Estate, formerly Mara Delta, is exclusively focused on investing in African (excluding South Africa) property. Its portfolio valued at $365.9 million (about R5 billion) at the end of last year is made of properties in Morocco, Mozambique, Kenya, Mauritius and Zambia.
Grit went on a capital raising exercise, a rights offer, in June this year, netting $121.2 million from that exercise. The BEE group, Drive in Trading, entered through this exercise by subscribing for about 23.2 million or 11.15% of Grit ordinary shares. That $32.5 million subscription was funded by the PIC, using a short-term loan.
Subsequently, Drive in Trading secured a senior term loan facility with Bank of America of $33.4 million to settle the short-term loan. Under normal circumstances this would have meant that Bank of America has taken PIC’s position on the BEE deal funding. But that’s not necessarily the case here.
The Grit announcement points out that “As security for the bank loan, the PIC has agreed to repurchase all the present and future liabilities and obligations of Drive in Trading under the loan facility, up to an amount of US$35 million, should a trigger event occur in terms of the contingency repurchase obligation (CRO) agreement.”
This essentially means that, should things go wrong the PIC will assume the risk and Bank of America will be able to recover its capital and walk away from the deal without a loss.
The PIC shares its risk with Grit. The announcement notes that the PIC and Grit entered into the Put Option Agreement, in terms of which Grit agreed to limit the PIC’s exposure by 50% through a Put Option.
The transaction also looks like a damn good transaction for the BEE group. It would seem they are not taking any risk whatsoever. Nice BEE deal of you can get it.
But there are voices of discomfort which might disturb this deal. The people who spoke to us have difficulty understanding why the PIC is funding a BEE deal that is anchored by foreign assets while overlooking many locally focused BEE deals.
It’s not very clear to us (Ujuh.co.za) why this foreign assets element is a problem, if proper due diligence were done and the allocation remains within the PIC’s broader prescriptions. But then the political noise surrounding the PIC, with speculation that a change of guard is in the offing, can disturb this deal.