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Preference shareholders bail out Ecsponent

In R2.3bn debt-for-equity agreement. But it’s uncertain whether they will get to recoup their investment.
The company says the ‘restructuring’ of its balance sheet greatly enhances its solvency and liquidity. Image: Moneyweb

Preference shareholders in embattled JSE-listed private equity group Ecsponent Limited had little choice on Wednesday but to agree to a restructuring of the group that will see R2.3 billion in preference shares converted into equity in the group.

Ecsponent, which reported a record half-year loss of R1.98 billion in April and has defaulted on paying out dividends to preference shareholders since March, revealed in a statement that it had “successfully converted R2.3 billion” in preference shareholder debt into equity.

Read:

Embattled Ecsponent reports record R1.98bn half-year loss

Ecsponent’s preference shareholders fear losing everything

It added that the “restructuring of the company’s balance sheet” greatly enhances its solvency and liquidity.

The announcement followed a general meeting of preference shareholders on Wednesday, where they had to vote on the financial restructuring of the group.

Two options

The around 2 800 preference shareholders, many of them pensioners, had to vote to either allow their preference shares to be converted into ordinary shares in the group or for an alternative new hybrid preference share scheme.

Speaking to Moneyweb, Ecsponent’s recently appointed CEO George Manyere said that most preference shareholders voted for the ordinary share option. This would see R1.8 billion in debt converted to ordinary equity.

George Manyere, CEO of Ecsponent Limited. Image: Supplied

“Around 22% of preference shareholders opted for hybrid preference shares. This is valued at around R500 million; however, it also qualifies as equity under IFRS [International Financial Reporting Standards] rules,” he noted.

Manyere said he was pleased that around 67% of eligible preference shareholders participated in the voting. “This is reflective of the open and transparent engagement that Ecsponent’s new management team has had with preference shareholders over the past few weeks and demonstrates the greater involvement stakeholders will have in the business.”

When news first broke of Ecsponent’s expected default to preference shareholders in February, investment analysts including Simon Brown and Anthony Rocchi warned that these shareholders stood to lose out even more if their preference shares were converted to “nominal” ordinary shares in the group.

Read:

Ecsponent’s default puts R2bn in preference shares at risk

Red flags as Ecsponent faces ‘default event’

Ecsponent’s share price was at just 6 cents on the JSE on Wednesday, valuing the group at around R65 million.

The stock has lost around 75% of its value over the last year.

 

Ecsponent share price over the past year

 

Besides the destruction of shareholder value, Brown noted at the time that most of the preference shareholders in the group seemed to be retail investors, many of them pensioners. Since then, several of these pensioners have contacted Moneyweb to highlight their situation and fears of losing their life savings.

The Financial Sector Conduct Authority (FSCA) confirmed to Moneyweb in April that Ecsponent Limited’s subsidiary, Ecsponent Financial Services (EFS), was under investigation for marketing “high risk” preference shares in the holding company to pensioners. Last week the FSCA imposed a two-week suspension on EFS, pending the outcome of the financial regulator’s inquiry into the company.

Read: FSCA temporarily suspends Ecsponent Financial Services’ licence

Having already lost out on receiving dividends, the move by most preference shareholders at Wednesday’s meeting to go for the ordinary share option seems to indicate that they are hoping to sell and get something out rather than risk losing all their money.

Those who have opted for the hybrid preference shares will have to wait for the company to turn around its financial fortunes before even being considered for some sort of dividend payouts again.

Turnaround milestone

According to Manyere, Ecsponent’s debt-for-equity restructuring is a “crucial milestone” in the group’s turnaround plan.

“It significantly strengthens the company’s balance sheet, which is crucial to our ongoing efforts to extract maximum value for all our stakeholders. The restructuring furthermore matches the liquidity profile of our investments,” he said.

“In the lead-up to the shareholder vote, we have been working around the clock to stem losses and rightsize the team and operations at Frankfurt-listed MyBucks, our largest investment.

We have also reduced a bloated head-office complement at Ecsponent, to bring it more in line with what is appropriate for a private equity business,” he added.

Manyere said Ecsponent had embarked on a series of virtual roadshows ahead of the general meeting, engaging with preference and ordinary shareholders on the options available to them.

“We had candid and honest discussions with our stakeholders ahead of [the] general meeting. We’ve onboarded several of their comments and recommendations, including the possibility of board representation and rebranding and renaming the business,” he said.

“We welcomed their views and suggestions and created a culture of open communication and transparency with all our stakeholders. This too will underpin our engagement with investors going forward.”

Questioned by Moneyweb on the debt-for-equity agreement leading to the dilution of Ecsponent’s current ordinary shareholder base, Manyere conceded that as the major shareholder his stake in the group would significantly be reduced.

“The outcome [from the voting and general meeting] means that existing ordinary shareholders, including myself, will see their stake diluting by about 97%. Specifically, for me, I am being diluted from 57% to around 1.2%. That is the effect… which to us is in the best interest of the company,” he said.

Listen to Moneyweb editor Ryk van Niekerk’s interview with Manyere:

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It remains a sad position, even though the company now try to make themselves like hero’s “saving the investments” of the pensioners. Converting debt to equity does not excuse you from your obligation to your investors. People were relying on the monthly dividends, I read through the “Q&A”, which was a copy and paste exercise, with spelling errors, paragraphs copied and the font not even changed. This shows the level of professionalism and attention to detail, in such a simple document, how will they be able to protect and preserve peoples hard-earned capital??

Personal comment: You can put lipstick on a pig, it will unfortunately remain a pig.

Unfortunately: If you put lipstick on a pig, it remains a pig

What a mess.
i am looking forward to seeing the directors and management of the company being sued in their personal capacity.

Debt for equity. This is the financial institution’s way to say we take your money for our mistakes and there will be no consequences. #suitscrooksandcharteredselfcenteredvagabonds

End of comments.

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