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Ecsponent’s default puts R2bn in preference shares at risk

It’s likely the group will continue to default on paying other preference shareholders: investment analyst Anthony Rocchi.
Pretoria-based financial services and private equity group Ecsponent, quietly put up notices about the default in Sens statements late on Friday, after market close. Image: Moneyweb

Embattled Ecsponent’s entire preference shareholder base of around R2 billion is at risk. This is in the wake of the group confirming on Friday that it will default on R188.3 million in payment obligations that has become due to preference shareholders.

That’s the warning from Anthony Rocchi, a portfolio manager at Rexsolom Invest, who is among the investment analysts who raised concerns after the Pretoria-based financial services and private equity group advised the market in early February of a possible default event.

Read:
Red flags as Ecsponent faces ‘default event’
Ecsponent defaults on pay-out to preference shareholders

“Now that Ecsponent has confirmed a default, it is more than likely the group will continue to default on paying other preference shareholders as and when these become due,” Rocchi told Moneyweb on Monday.

“For all intents and purposes, you’re not going to default on some tranches of preference shares and honour others…. The company has already said that it isn’t able to pay its dividend obligations on its various classes of preference shares going forward,” he added.

In its JSE Sens market update on “strategy and [the] solvency and liquidity of the group” published on February 11, Ecsponent noted that it “will not be in a position to settle its obligations as they become due”. The group added that it was considering converting its preference shares into ordinary shares as part of a capital restructure.

“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 said at the time.

‘Diluted out of existence’

Rocchi says the confirmation of a default on Friday, which was quietly announced after the market had closed, could mark the “the beginning of the end for Ecsponent”.

He notes: “For Ecsponent’s preference shareholders, a conversion of preference shares to ordinary shares will mean they are stuck with worthless shares that are pretty illiquid.

With around R2 billion in what now has become nominal value preference shares, these will effectively be diluted out of existence when they become ordinary shares.”

Ecsponent’s already-weak share price plunged to just 2 cents a share at the JSE’s close on Monday, having lost 75% of its value since the negative market update on February 11 and confirmation of a default on Friday.

The stock has effectively lost almost 90% of its value over the last year and more than R230 million has been wiped off the group’s market cap since April last year.

Cash-strapped Ecsponent noted in a trading statement, linked to its market update issued earlier this month, that it expects to report a loss for its half-year period to December 31, 2019. However, the scale of the loss was not revealed.

This follows the group reporting a R255 million “total comprehensive loss” for its last financial year, ending June 2019. In its annual financial statement for the year, it noted that “the going concern position” of the group would need to be “considered as a key audit matter in the current year”.

Restructure plan

Approached for comment on Monday regarding the default, an Ecsponent spokesman sent a brief message to Moneyweb:
 
“The company is currently engaging with various advisors and the JSE on its alternative structured product. At this stage, Ecsponent cannot elaborate more than what has been communicated in the Sens…. Once there is more finality on the product, the company would be happy to engage on the way forward,” it said.
 
Ecsponent largely invests in ‘fintech’ businesses and offers business-to-business loans to such start-ups. The group is looking to focus “almost exclusively” on private equity investments as part of its proposed restructure plan.
 
As part of the move, it has also turned its loans into equity in some of the companies it has invested in, most notably Frankfurt-listed MyBucks SA, which is a microlender in several southern African countries.
 
MyBucks SA was founded by former Blue Financial Services boss Dave van Niekerk. However, Van Niekerk is no longer involved with MyBucks.

Executive changes

In August last year Ecsponent’s long-time CEO Terence Gregory resigned. It followed the resignation in January (2019) of long-time non-executive board member, Brandon Topham, who was also head of Ecsponent’s audit committee. Topham is currently the director of investigations and enforcement at the Financial Sector Conduct Authority (FSCA).

Meanwhile, following Ecsponent’s market update earlier this month, the group announced the resignation of two further board members, Shaka Sisulu and Richard Connellan. Sisulu, an independent non-executive director, resigned from the board with effect from February 10, while Connellan, who has served as a non-executive director and chair of the board of directors for nine years, departs on February 28.

Ecsponent’s current executive vice chair, Zimbabwean businessman George Manyere, is the group’s acting CEO. Manyere, a key player in the group after securing a major share in 2018, is the founder of Brainworks Capital – the first Zimbabwean company with a primary listing on the JSE main board in 2008. He served as CEO of Brainworks until 2017.

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Don’t worry. I’m sure the directors have been paid their bonuses and cashed in their shares long ago so they’ll be OK.

Reckless Dave – – – over promising, over spending (internally) but under delivering – usual story.

What are the current options available for preference shareholders?

This is a conversation you should have with the person who advised you to buy the pref shares. Pref shares are backed by the business model of the company. That is where the problem lies.

Take the adviser that sold you the investment to the FAIS Ombud – This business was doomed from the start – The Directors should be declared delinquent. All ex sharemax losers that formed the new company.

Reference to ex-Sharemax kingpins that started (or that run) Escalator / Ecsponent is devoid from the truth. There is only ex employee of Sharemax working solely as an employee at Ecsponent.

Investors should strongly resist the conversion of preference shares and/or debentures to ordinary shares and take heed of the two important hints as provided by Gemini here above. Also very carefully consider the calibre of the appointment of any business rescue practitioner – should it eventually result to this avenue.

so in short….”we are currently assessing various options of how the flee the country…”

There are a lot of pensioners whose livelihood has disappeared.
Just a couple of hours before the announcement I received, from the Ecsponent Financial Services consultant, the forms to sign to invest a further half a million.

End of comments.

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