After Sasol ditched plans of issuing new shares to fund the debt of Sasol Inzalo – the R28 billion empowerment scheme that was launched in 2008 to hold 10% of its shares – shareholders of the chemicals and oil group have suggested other ways of settling the debt.
Sasol’s board was pressured by shareholders to abandon the issue 43-million new shares and use the proceeds to repay the bank debt that Inzalo has to repay when it is terminated in September 2018.
A successful R13 billion share placement would enable Sasol to keep the 25-million group ordinary shares owned by Inzalo from being released to the market after it is terminated. The release of these shares to the market would impact Sasol’s shares drastically.
Sasol shareholders objected to the share issue as it would dilute them by 4%.
“The alternative forms of funding could be by raising debt onto Sasol balance sheet or by reducing the amount of dividends paid to shareholders,” said Tracy Brodziak, the senior investment professional at the Old Mutual Equities boutique at Old Mutual Investment Group.
These alternative forms of funding may be preferable to issuing shares, said Brodziak. Old Mutual Investment Group holds a 2.8% stake in Sasol.
The terminated share placement would not be sufficient to cover all debt obligations, creating a funding shortfall of between R2 billion and R3 billion. Sasol recently said it could offer Inzalo a R2 billion guarantee if there’s a shortfall to its debt.
Most participants funded their Inzalo investments nine years ago through debt, provided by banks or Sasol, while other investors used their own cash.
Sasol has paid dividends worth R7.6 billion over the last nine years to Inzalo, in which R5 billion was paid to banks to service debt and the remaining R2.6 billion was paid to employees, suppliers and customers and black investors.
The Inzalo scheme has come under fire for benefiting banks, lawyers, and corporate advisors more than black shareholders.
The dividends paid to the Inzalo scheme are not enough to settle the debt. The debt could be fully paid if Sasol’s share price rapidly appreciates to at least R480 in the next 11 months. At the time of writing Sasol’s share price, which responds to Brent crude oil prices and rand/US dollar exchange movements, was R389.86.
At current levels, Sasol would have raised R16.8 billion through the 43-million share issue.
The required share price appreciation is unlikely to happen, said Sasol’s CFO Paul Victor recently when the company unveiled its new R21 billion Sasol Khanyisa scheme that would replace Inzalo. With the share placement being abandoned, Sasol is considering other funding options and is engaging with external banks. The Sasol board will only make a final decision in 2018 on how to finance the Inzalo debt.
Hanré Rossouw, portfolio manager at Investec Asset Management, said Sasol could use cash on hand. Investec Asset Management has a 2.8% stake in Sasol.
Rossouw said that Sasol would want to keep its debt within investment grade limits given that its US$11 billion Lake Charles Chemicals Project in the US, which is centered on an ethane cracker that has the capacity to pump out ethylene at a rate of 1.5 million tons/year.
Sasol has already sunk $7.5 billion in funding the project (some of which is debt), which is more than 70% complete.
The favourable combination of a weak rand (by 4%) to the dollar over the past month and an oil price that has breached the $55/barrel level, might provide a cushion to Sasol for funding the Inzalo debt from existing cash resources.
Given these dynamics, Rossouw said Sasol would have been comfortable to pull the abandoned rights offer. “However, Sasol should deal with the Inzalo restructuring separately to a broader balance sheet management. If things really look ugly next year then they could always look at ways to sort out its balance sheet,” he said.
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