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Red flags as Ecsponent faces ‘default event’

Around R188m in payment obligations due in March, largely to preference shareholders.
There is a risk that retail investors who bought Ecsponent’s preference shares for the steady stream of dividends and higher yields could end up with nothing. Image: Moneyweb

Investment analysts have warned that ‘Average Joe’ retail investors, many of whom may be unsuspecting pensioners, stand to lose out significantly if JSE-listed private equity and financial services group Ecsponent does default on its payment obligations to preference shareholders.

This comes in the wake of Pretoria-based Ecsponent warning in a “Market update on strategy and [the] solvency and liquidity of the group” last week, that it “expects a default event to occur on its March [2020] redemption obligation” to preference shareholders totalling around R188.3 million.

The group also noted that it will not be able to pay its ongoing dividend obligations on its various classes of preference shares. According to investment analysts, the ‘small cap’ has around R2 billion in preference shares in issue.

Read: Ecsponent warns it can’t pay preference shareholders

Ecsponent’s already weak share price lost further ground following the publication of the market update, which also stated that the group is considering converting preference shares into ordinary shares as part of a capital restructure in the “event of a default”.

Its share price is down three cents since the market update and closed at five cents a share on Friday, valuing the group at just R54 million on the JSE.

The stock has plunged over 80% in the last year, and more than R200 million has been wiped off the group’s market cap since April 2019.

A number of noted investment analysts have not been great exponents of the group, questioning its business model of continuously issuing preference shares and funding start-up and fintech businesses, which they see as risky. The group initially operated in the unsecured lending space before moving into business-to-business loans and private equity.

Cash-strapped Ecsponent, which is set to report a loss for its interim period to December 31, 2019, is now restructuring its business to focus “almost exclusively” on private equity investments. As part of the move, it is looking to turn 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.

“Things have gone horribly wrong for the group,” Anthony Rocchi, portfolio manager at Rexsolom Invest, told Moneyweb.

He says preference shareholders are likely to be hardest hit if the group defaults on its obligations and is forced to convert preference shares into ordinary shares.

Luister na Moneyweb redakteur Ryk van Niekerk se onderhoud met Luciano Benade, finansiële raadgewer, Efficient Wealth: 

“Most of the group’s shareholders are retail investors, most likely Average Joes such as moms and pops and pensioners, who may have unsuspectingly invested in a high-risk business,” he notes.

“As unsophisticated investors, many of them will have been attracted to the much higher and often ridiculous yields of the company.

“However, they now face the prospect of having their preference shares converted to ordinary shares, which isn’t a good thing,” says Rocchi.

“Ecsponent’s ordinary shares are illiquid. At least with the preference shares, you get fixed dividends … Now the group is looking at invoking a clause to convert preference shares to ordinary shares, which means that preference shareholders will not only lose their dividends but must deal with illiquid ordinary shares.

“With its share price being in the toilet, you can’t even give their ordinary shares away,” he points out.

Rocchi is not invested in the group. Neither are AlphaWealth small cap analyst Keith McLachlan or Just One Lap founder Simon Brown. All three analysts have looked at Ecsponent, but were not convinced about its business model and did not invest.

“I’ve looked at the business and decided to stay well away,” was all McLachlan was willing to say when asked for comment.

Rocchi and Brown point out that Ecsponent has very little in the way of institutional investors, with most of its shareholders being retail investors.

“These retail investors will now be between a rock and a hard place,” says Brown.

“Many won’t know what to do as their preference shares are likely to become useless if converted to ordinary shares. These mom-and-pop retail investors would have bought preference shares for the steady stream of dividends and higher yields, without fully understanding Ecsponent’s business and what they were getting. There is a real risk they could end up with nothing,” he adds.

“If I were one of these preference shareholders, I would phone a lawyer to see whether I had some sort of claim if I was mis-sold the product.”

Ecsponent was approached for comment by Moneyweb, but a company spokesman said the group is under cautionary and referred Moneyweb to its JSE Sens statements.

Following its market update last week Ecsponent announced the resignation of two 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 noted that Connellan has accepted an executive position with the Takeover Regulation Panel.

These resignations follow that of the group’s former CEO, Terence Gregory, last year. According to the company’s website, Ecsponent’s current executive vice chair, Zimbabwean businessman George Manyere, is the group’s acting CEO.

Manyere, a key player in the group and some of its associated companies, is 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.

 

Ecsponent share price

 

 

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Most Smart Money is long gone from this one – I just could not fathom how they were able to pay dividend almost weekly. I mean even the reserve bank would run out of reserves it were to keep at that pace. The whole thing never made sense to me. I figured, ‘if its to good to be true, it probably is.’ Well, if you play with a brazier long enough, don’t complain if you are scorched!

Pref shares are like condoms. When purchasing pref shares, stick to the trusted brands. Don’t buy cheap Chinese imports. They promise performance, protection and safety, but when push comes to shove, they disintegrate and leave you exposed, infected and anxious.

Pref dividends have been financed by a new issue of new pref shares that’s paying Paul with Peters money there was never really ay cash flow after-tax profits to pay real dividends. This is a scheme of the money goes round amongst investors capital.

In short, a pyramid scheme.

This one the FSCA should have picked up more than a year ago. We will now see their cavalry arive on donkeys warning everyone about ponzi schemes….when it is too good to be true…high rerurns, etc.

I wonder what their slow response has cost investors.

A business model built on providing unsustainable returns to investors, yet people still buy into it.

A fool and his money are soon parted. Go back and look at what happened to Fidentia – there are some interesting similarities. I just cannot believe that investors (professional or not) will not have the common sense to ask a few basic questions before parting with their money.

I am afraid I am one of the fools. I follow the herd. When something good comes up I buy. My problem is I do not know when to sell, because as a share drops I am afraid to sell not wanting to lose. Take a look at Steinhoff. I should have sold the minute it started to drop. But I held on losing more heavily in the end.

Fools are not honest like you. You are a bright one, my friend. The fools are the ones who brag about all the money they made by trading Forex.

Hi, Does anybody have any views on Fedgroup’s preference share? I trust not all preference share companies offers are the same as this one.

End of comments.

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