HANNA BARRY: Short-term unsecured lender, Bridge, has applied for business rescue due, it says, to a lack of institutional funding caused by some risk aversion around the unsecured lending sector in South Africa after the failure of African Bank. Now ordinary people could invest in Bridge and essentially fund its lending activities, these 1200 investors or so will see their returns slashed from as high as 19% in many cases or 12% in others to just 6% so that the company can generate sufficient internal funding to remain a going concern.
On the line now to discuss what the business rescue process means for investors is Cliff Coombe, executive director at Bridge. Cliff, thanks for your time this evening, why the decision to place Bridge into business rescue and not simply restructure the company to better deal with the challenges it’s facing?
CLIFF COOMBE: Hanna, yes, thanks for the question, I think the first thing that we need to understand is that this is not simply your run of the mill restructure, we are asking our investors to participate in this process and it’s fairly…it touches them where it hurts most. It’s their pockets and we need a buy-in from all the investors in Bridge.
So this is where we take the mechanism of business rescue, which we believe has been developed specifically for a position like this where we can have a collective bargaining process, where everybody who’s got a vested interest can come in, have their say, participate in the process and then ultimately vote on the business rescue plan, so that it’s not something that’s just forced upon the investor, all stakeholders must play a role in this process.
HANNA BARRY: Cliff, what kind of a timeline are we looking at in terms of voting for the business rescue plan and then seeing it completed, can you give us some dates.
CLIFF COOMBE: Look, it’s difficult, Hanna, the plan that we ultimately decide on could be a longer-term plan, could be as long as three, four years but the business rescue process could be finalised as quickly as six months, seven, eight months. That will all depend on the participation of all the role players one, and two obviously the business rescue practitioner, Mr George Nel, is really now in control of that process. There are timeframes prescribed in law but due to the size of the business it will take a month, maybe two to get everyone together, get all the input and then hopefully vote on the plan. What we are hoping for and what we are going to be pushing for as the directors is to get this thing turned around as quickly as possible, we do not want a protracted process, we’d like to get the guys in, get their input, turn it around and finish the process so that we can get on with business as usual.
HANNA BARRY: Cliff, can you give an indication as to how much money Bridge needs to raise or perhaps cut back on in order to remain a going concern, you mentioned that it spends around R17m a month to facilitate lending transactions, which enables it to then put out around R100m a month into the market in the form of loans, how are those figures going to change?
CLIFF COOMBE: Yes, Hanna, we’ve got two sides to the business, obviously the investor side where we’re paying out investor return and then on the operating expenses side, which is what you’re referring to now. Now simply put, Bridge has built a business that has the capacity to put R100m a month into the market, which is not massive in terms of the size of the market but it’s a healthy business and that was what our planning was built and structured around. So what we now need to do is bring it down because we are essentially going to be self-funding in the next foreseeable future because we don’t believe that institutions at this point will be funding this sector any further, not in the short term in any event.
So we believe that we can put R20m to R25m a month into the market from a self-funding perspective and that would then mean that we would have to adjust our infrastructure to accommodate a quarter of what it was built for.
HANNA BARRY: Would that entail potential job losses or scaling down on certain operations?
CLIFF COOMBE: Hanna, the unfortunate reality is that is a fact, it is an unfortunate thing that we will have to do but there will be job losses, there will be some of the branches. The size of the effect of it I can’t speak to because we will have to decide as a group, all stakeholders have to participate in the process and then come up with a business rescue plan. So ultimately I can’t give you the figures right now but the realities are that for the time that we are in, the economic cycle that we’re operating in, we would need to restructure the business and that would need some harsh reality issues like cutbacks on jobs.
HANNA BARRY: Let’s talk about the impact on investors now, I mentioned earlier that obviously they’re going to see their interest payments cut quite significantly, could I as an investor then be seeing a return of 6% for the next five years, foreseeably?
CLIFF COOMBE: Hanna, again, it will depend on the final plan, at this point we’ve agreed with the business rescue practitioner that we will keep on paying a 6% return, which is to our minds related to what the banks in general would be offering. This would be the case for the next two to three months or two months while we’re finalising the plan, hopefully by then we’ll have the plan and that will then ultimately determine what the final figure is and for how long that will be repaid.
In terms of the debentures that were issued 18 months ago, those debentures have a five-year term, it’s a legal requirement, so there’s three and a half years left in terms of the running period on those and that’s why we’re saying you’re looking at probably three and a half years in terms of whatever the plan would have to entail.
HANNA BARRY: Just in terms of the loans that Bridge has issued, Bridge I think is quite confident that it’s lent money to people who can afford it, although it has come under fire in recent years for emolument attachment orders, which are often called garnishee orders, although incorrectly but essentially where creditors attach a part of your salary in order to be paid…they attach that salary directly from your employer. You said in your business rescue statement that defaults are at a five-year low, how does Bridge define a default or a non-performing loan and what percentage of your book would you say is non-performing?
CLIFF COOMBE: Hanna, yes, again, the business rescue plan and the reason why we went into business rescue is to ensure a sustainable future. This touches on capital preservation for all those investors, we want to make sure that even though the guys are taking less of an interest rate they can sleep sound in the fact that their capital will be preserved for the remaining period.
Now being a strong business and having a sustainable future obviously depends on the fundamentals and Bridge has never had any issues on the fundamentals, we believe that it is a good business that’s got a good positioning in the market, we have a strong client base, we have an 18% bad debt average, which we are quite happy with, it’s coming down and it’s the simple fact that there are that many clients in the market looking for loans that the quality of loans are certainly improving. So we’re confident that the business model is as strong as it was 18 months ago when this process was kicked off.
The only issue that we are dealing with is a funding issue, so we’re looking at the economic climate and the cycle around this and we’re saying if we’re not going to get funding in the short to medium term immediately now we have to become self-funded, we need to reinvest, the operating expenses need to cut down, reinvest that and also reinvest a portion of our investors’ returns into our own assets to make sure that we are a sustainable business in the future.
HANNA BARRY: Cliff Coombe is an executive director at Bridge.