JSE-listed construction and engineering group Aveng is to embark on a rights offer – the second in the past two years – to raise a minimum of R300 million as part of a plan to restructure its debt and recapitalise the group.
Aveng on Wednesday also reported that it expects to report a decline in the size of its loss for the year to June 2020 compared with the previous year.
The proposed rights offer at 1.5 cents per share, follows Aveng in July 2018 raising R493 million of new capital as part of a strategic action plan to reduce the group’s then-unsustainable debt of R3.3 billion, including R1.3 billion bank debt and R2 billion convertible bonds.
It also follows the Supreme Court of Appeal last week ruling in favour of the SA National Road Agency (Sanral) after a joint venture comprising Aveng and Strabag International (ASJV) claimed force majeure and subsequently terminated the R1.63 billion Mtentu bridge project on the Wild Coast in 2019 because local community members were disrupting construction.
The ASJV launched a pre-emptive urgent application in the North Gauteng High Court in February 2019 for an order preventing Sanral from making a call on the contract securities, until the dispute between the parties regarding the termination of the contract had been finally determined.
This relates to a R245 million performance bond and R87.1 million retention bond for the contract.
The ASJV took the case on appeal after the North Gauteng High Court ruled against the joint venture.
The quantum of funds to be claimed under the contract guarantees has yet to be argued.
Holistic debt restructuring, recapitalisation needed
Aveng said on Wednesday its latest rights offer is fully underwritten by the group’s largest shareholder, iNguza Investments (RF) Limited.
Explaining the rationale for the rights offer, Aveng said it embarked on a plan to sell non-core assets and reduce the unsustainable net debt in February 2018, adding the group in August 2019 renegotiated its debt with its South African lenders and extended the maturity dates of its debt package to June 2021 and September 2021.
Aveng said at the time it was the group’s intention to renegotiate its debt package in the last quarter of the 2020 financial year with a view to achieving a sustainable level of debt for the core businesses.
However, the onset of the Covid-19 pandemic resulted in delays to the non-core asset sales process and required the company to obtain additional liquidity for its South African operations, which was provided by its South African lenders.
Aveng said the liquidity shortfall during April and May 2020 was managed through a short-term facility of R200 million by the group’s South African relationship banks, which was repaid in August 2020, and the savings contributed by staff, management and the board taking salary and wage cuts of about R168 million.
But the company said it became apparent to the board and the management team that a more holistic debt restructuring and recapitalisation of Aveng would be required to increase the likelihood of a sustainable outcome for all stakeholders in Aveng.
The group said it has since engaged with various stakeholders, including its South African lenders, the holders of notes issued through iNguza Investments (RF) Limited and others, and reached an in-principle agreement on a restructure.
Apart from the R300 million rights offer, the restructure will result in the:
- Restructuring of the South African lender debt into restructured term and overdraft facilities of R1.102 billion, with a term of three years.
- Settlement of the remaining debt by way of a cash settlement of 31 cents on the rand, or a specific issuance of new ordinary shares at 5 cents per share.
- Settlement of the iNguza notes debt by way of an election of an early cash settlement at 31 cents in the rand or the participation in the restructuring of the South African lender debt.
“Following a multi-year journey, this transaction will allow the group to reset its capital structure, deleveraging the balance sheet by more than R1 billion, extending the group’s maturity profile to three years, and simultaneously materially improving the group’s South African liquidity pool.
“Following this transformational event, Aveng believes that the remaining debt is sustainable and the reinstated balance is forecast to be repaid over the next three years,” it said.
Aveng added that this transaction not only provides it with the capital structure flexibility to complete its non-core asset sale programme and wind down its remaining exposure to discontinued businesses but also sets the group on a path to pursue its strategy around the group’s core businesses, McConnell Dowell and Moolmans, which have returned to profitability and where Aveng sees further business improvement prospects and growth opportunities.
Turning to the financial performance of the group’s core businesses, Aveng said the headline loss per share for the year to June is expected to improve by between 48% and 51% to between 5 cents and 4.8 cents from the reported loss of 10.5 cents a share in the prior year.
Peregrine Capital executive chair David Fraser said on Wednesday he was unable to reconcile the rhetoric by Aveng with the group’s numbers.
“The loss still looks pretty decent to me. When you read the first three pages of the announcement, it sounds like this company is performing wonderfully but all of a sudden it needs money to survive.
“It wasn’t that long ago that Aveng had R5 billion on its balance sheet when it sold its stake in Holcim cement. How times have changed,” he said.
Aveng sold its 46.65% stake in Holcim South Africa to the AfriSam Consortium for R7.4-billion in 2007.
Shares in Aveng rose 50% on Wednesday to close at 3 cents.
However, the company’s announcement about the right issue was only published a few minutes before trading on the JSE closed.