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Ecsponent warns it can’t pay preference shareholders

Board expects ‘a default event’ to occur on its March redemption- and ongoing dividend obligations.

Pretoria-based Ecsponent – a small-cap private equity and financial services group listed on the JSE – warned in a market update and cautionary on Tuesday that “it will not be in a position to settle its obligations” of some R188.3 million, which will become due largely to its preference shareholders.

The group said that the payment obligations are due to preference shareholders in March (2020). It will also not be able to pay its ongoing dividend obligations on its various classes of preference shares.

Ecsponent added in a trading update in the same Sens announcement, that it expects to report a loss for its interim period to December 31, 2019. The scale of the loss is yet to be determined.

The cash-strapped group, which largely invests in ‘fintech’ businesses and offers business-to-business loans to such start-ups, has now embarked on a restructure of its business to focus “almost exclusively” on private equity investments. As part of the move, it’s turning its loans into equity in the companies it has invested in.

“As a result of the change in the business model into that of a private equity investment, the company no longer considers the issue of its current classes of preference shares or notes an appropriate form of funding,” Ecsponent explained in its Sens statement.

“The company will accordingly be considering alternative forms of funding going forward. The board is currently assessing various options pursuant to a capital restructure of its preferences shares and/or alternative forms of funding, specifically also taking into account the potential conversion of preference shares into ordinary shares in the event of default in accordance with the terms of the preference shares,” it added.

Ecsponent said that it was also considering disposing of certain non-core assets in order to “deleverage the group’s balance sheet”.

The group noted that various funding alternatives, which its board had considered for the refinancing of its preference share debt, had been “exhausted”. This was due to “the company’s current asset base”, which it claimed is aimed towards long-term capital growth and not capable of conversion into cash in a short space of time.

“The company announced during 2019 the conversion of a material amount of its business-to-business interest-bearing loans into the underlying equity investments, most notably the substantial increase in the equity investment in MyBucks SA to obtain greater influence over the direction of the MyBucks SA Group,” Ecsponent explained.

“MyBucks SA’s past performance was particularly disappointing which necessitated shareholder intervention and culminated in a significant restructure of this group’s operations during 2019.”

Besides MyBucks SA, Ecsponent’s other equity investments includes InvestSolar Africa; Getbucks Microfinance Bank Zimbabwe; Ngwedi Investment Managers Proprietary; MHMK Capital Botswana; MHMK Capital Eswatini and, Chrome Valley Mining.

“The portfolio holds significant underlying value which is estimated to require the next three to five years to fully materialise,” the group noted.

“The board is currently investigating the conversion of further loans in its business-to-business loan book into equity investments… As at the date of this announcement, the remaining loan book, after taking into account conversions into equity and impairments, will approximate R61 million.”

Ecsponent’s share price has lost more than 73% of its value over the last year and was trading 1 cent down at 7cents a share at 2:45 on Tuesday.

Ecsponent shares over a year

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More bad corporate news

A private opinion:
The inability to redeem- or to service dividends of preference shares, will inevitably also extend to the redemption of bonds (debt notes) issued and the interest return (coupon rate) payable on same.

It is an excuse to now claim that the investments made from the monies raised – mostly from retail private investors through a marketing team – “is aimed towards long-term capital growth and not capable of conversion into cash in a short space of time.” Why then raise money for an investment term of five years in the first instance and only when you have to redeem, then the lame excuses jumps out.

The conversion of the investor instruments (preference shares and bond notes) into ordinary shares (equity) is off course to try to prevent liquidation claims from investors and to simultaneously cancel the preferential (seniority) rights enjoyed by preference share- and bond note private (retail) investors.

The mainly Afrikaans speaking, mostly elderly private investors are going to bleed profusely – once again – and probably again without any repercussions from the regulators, JSE, CIPC or S.A. justice system.
It seems likely that this group will be suspended from trading rather sooner than later.

Pref shares are like perished condoms. They promise performance, protection and safety, but when push comes to shove, they disintegrate and leave you exposed, infected and anxious.

Ecsponent was,is just too good to be true.

mmm..is the one pref paying the dividends of the other prefs?… = ponzi

Put the directors in shackles until the matter is resolved – if not resolved then send the directors off to prison

Spoiler alert: Nobody goes to jail.

A sign of things to come as SA finds itself in its death throes.

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