Capitec co-founder extends hedge over R2.5bn stake

Le Roux now has hedges in place over R8bn in shares …
The strategy offers protection against the share price dropping below a specified level, but potential upside is also limited. Image: Supplied

Capitec Bank co-founder Michiel le Roux has completed a hedging and financing transaction over 1.25 million shares he holds in the company.

The collar, structured over four tranches between August and this month, effectively allows him to borrow money against the stake. At current market prices, the shares are worth approximately R2.5 billion.

A collar is a hedging strategy that offers protection against a share price dropping below a specified level, but potential upside is also limited.

Le Roux first structured this hedge over these 1.25 million shares in December 2018, through one of his investment vehicles Limietberg Sekuriteit.

Reasons

At the time, it noted that the hedging transaction was put in place “due to the continued volatility in the market and Mr le Roux’s age”.

Until that point, Le Roux had practically all his wealth tied up in Capitec stock.

In 2019, Le Roux told the Financial Mail that he had “hedged the risk, as I am growing older and need to acquire a little bit of balance in my personal portfolio”.

Read: Michiel le Roux donates R100m to Covid-19 efforts

Hedges

In total, Le Roux has structured four hedges – in 2017 (rolled over in 2020), 2018 (rolled over this year), 2019 and 2020 – bringing the total number of shares hedged to 4.1 million. The bank says financing facilities are covered by 4.7 million shares.

In 2018, it explained that the collar was structured to “protect the downside risk of the share price at 90% of the current value on 1 250 000 Capitec shares”.

It added: “In order to reduce the cost of the protection, Limietberg was willing to forfeit the growth above 170% of the current value of the shares.”

It said at that time that Le Roux’s Limietberg intended to “cash settle the transaction at maturity as opposed to selling any shares”.

In July, the bank announced that certain of these vehicles were restructured and that the counterparty to the collar transactions was now Kalander. Kalander holds 5.95% of Capitec, while Limietberg holds 4.89%.

Capitec says “Kalander will always be in the position to fully cover the liability under the financing arrangement with the hedged shares” and that “as with the 2018 Transaction, Kalander’s intention remains to cash settle the … transaction”.

The four tranches of the latest transaction

Aug 3, 2021 Nov 15, 2021 Nov 19, 2021 Dec 20, 2021
Number of shares 330 000 165 000 165 000 5900 00
Put strike price R1 465.84 R1 665 R1 665 R1 741.95
Call strike price (average) R2 850.24 R2 660.20 R2 662.20 R2 845.19
Deemed value R539m R302m R305m R1.14bn

Source: Capitec

The new collars are set between put strike prices of between R1 465.84 and R1 741.95 a share.

Typically, if the share price falls below the levels of the put strike prices, the investor is forced to sell them.

This means that if Capitec’s share price drops below these levels, Le Roux’s Kalander will be a forced seller.

Over the next three years, Le Roux’s upside – the call strike price – is limited to between R2 660.20 and R2 850.24 a share.

Probe

Last year, a hedging transaction by Le Roux drew the attention of the JSE because it was done just two days before the bank issued a profit warning.

Read: JSE probes Capitec directors’ share trading

Capitec CFO Andre du Plessis told Moneyweb at the time that Le Roux had obtained clearance for the hedging transaction on May 4, more than three weeks before the profit statement was issued.

In March 2020, as Covid-19 pandemonium hit markets, Capitec shares tumbled 39% to around R550.

Read: Fear and loathing grip Capitec

In a “general statement” to the market on March 19, the bank said it believed that “the sharp decline in the Capitec ordinary share price since yesterday may be attributable to the following technical reasons:

  • “International shareholders are impacted by the continued weakening of the rand which, over and above the declining share price, further motivated the disposal of their Capitec shares.
  • “The algorithms applied by professional traders enforce disposal of a share when the price of that share declines below a certain limit.
  • “Banks that are counterparties to collar transactions are inclined to sell the underlying share when contracted limits are breached”.

Without mentioning Le Roux directly, it is clear that there were forced sales as the price tumbled under certain of his hedges.

Read: Capitec results show recovery – and continued growth

From its most recent annual report, Le Roux’s holding declined by 106 110 shares between March 1, 2020 and February 28, 2021. One can surmise this was as a result of those forced sales.

Le Roux owns a total of 13.2 million shares in the bank, equal to 11.41%.

From its most recent annual report, Le Roux’s holding declined by 106 110 shares between March 1, 2020 and February 28, 2021. He sold these shares in April and donated the proceeds of this disposal – R99 million – to three organisations responding to the impact of the Covid-19 pandemic, namely the South African Future Trust, the Solidarity Response Fund NPC and the South African SME Relief Trust.

Le Roux owns a total of 13.2 million shares in the bank, equal to 11.41%.

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