PPC has effectively fended off debt claims, by senior lenders to its unit in the Democratic Republic of the Congo (DRC), against its South African balance sheet. A rights issue at home also seems unlikely following the impending conclusion of disposals of non-core assets at home and off-shore.
Notwithstanding Covid-19 and the subsequent lockdowns imposed in some of the jurisdictions where PPC operates – South Africa, Botswana, Zimbabwe, Rwanda, the DRC and Ethiopia – latest results for the year ended 31 March 2021 show that the company has mostly avoided the worst outcomes at home and in the rest of Africa; in particular, on the DRC debt.
How SA balance sheet got exposed
The DRC market is the main source of the company’s debt woes, which began around 2014 with the construction of a $280m greenfield integrated cement plant in the western region. The plant has the capacity to produce 1.2m tonnes of cement a year. However, since the plant became operational, cement supply in the DRC has consistently outpaced demand and resulted in disappointing sales figures for consecutive years.
A total of 60% of the funds to build the DRC plant came from project debt financing sourced from the International Finance Corporation (IFC) and PTA Bank (now the Trade and Development Bank for Eastern and Southern Africa or TDB. The duo acted as co-lead arrangers and PPC had first sponsorship obligations for the debt. Primarily, this is how the South African balance sheet got exposed to the DRC debt.
Together, the IFC and TDB advanced some $175m in project debt financing towards the DRC plant. In addition to its loan component of the funding, the IFC bought 10% equity in the DRC venture for $11m. The venture fell under PPC Barnet DRC and was 69% owned by PPC, with the Barnet Group and the IFC holding 21% and 10% respectively.
Around 2017-18, PPC ran into liquidity problems. The company approached the IFC and TDB for a two-year moratorium on capital repayments as well as a two-year extension on the debt repayment period. During the capital repayment moratorium period, starting in 2018, PPC paid interest on the debt.
Frank way out of debt burden
But when Van Wijnen, whose appointment as CEO was announced in mid-2019, officially took over at PPC in October 2019, he told The Africa Report: “One of the first things I realised was that the setup we had with the project finance in the DRC was unsustainable.”
The moratoriums could be best described as kicking the can down the road. So, “we quickly had a frank discussion with the lenders in the DRC. And said, ‘We can continue to kick the can down the road. But we have a real lasting problem here: that South Africa cannot continuously fund the DRC operations’,” Van Wijnen said.
The talks took place before the pandemic. “When Covid-19 hit, it became clear this setup would not function going forward. That led to a series of discussions with the lenders to find the best possible alternative, [with] a few scenarios on the table,” he said.
Ultimately, the parties involved resolved that PPC make one final payment of $16.5m towards the debt. In exchange, PPC entered into a debt-for-equity swap agreement.
“Our economic interest will significantly reduce. We don’t expect economic benefits for the foreseeable future. But more important, for us, [is that] we will no longer have to make payments out of South Africa for the so-called ‘deficiency funding’,” said the PPC CEO.
For the first time in a long time, you’ve got a normalised year. You’ve got good management. The company is sounding credible again. People can look at PPC without all of the internal noise it used to have.
This has brought relief with regards to the South African balance sheet. The agreement “allowed us to take this enormous debt that was sitting on our balance sheet, out of it,” Van Wijnen said.
“That, in combination with better-than-expected trading conditions in South Africa; the kicking in of all the cost actions the team has put in place; and the sales of our non-core assets; puts us in a position we believe, if we finalise these agreements, … to have a good discussion with the South African banks to avoid a rights issue altogether,” he said.
“In our going concern note, we disclose very carefully – so that it’s clear to our external stakeholders and capital providers – what needs to happen in order for us to steer away from the rights issue,” said Van Wijnen.
Sale and purchase agreement
PPC Lime and PPC Aggregates Botswana are the two candidates up for sale as part of the disposals of non-core assets. The disposals form part of PPC’s restructuring and refinancing efforts, and are intended to raise capital.
PPC has agreed to sell PPC Lime to Kgatelopele Lime. The transaction will be deemed final when all conditions precedent, including obtaining approval from South Africa’s competition authorities, are fulfilled.
PPC Aggregates Botswana also has a buyer. PPC has entered into a sale and purchase agreement for the business and anticipates the transaction will be finalised before 1 August 2021, when all conditions precedent will have been met.
Independent analyst Rowan Goeller explained that the PPC Barnet DRC debt issue had caused problems for the company because the South African balance sheet “was trying to cover the costs of the entire group. The DRC had high debt, and it [PPC] wasn’t able to service that. That brought into question the sustainability of PPC.”
Getting to grips with internal controls
In addition, “over the years, the financial controls have been poor. It’s taken a while for PPC to sort out,” Goeller said.
Van Wijnen admits that there have been issues with internal financial controls saying: “We’ve made progress in that field – as also acknowledged by our external auditors [Deloitte]. However, this is not something that happens overnight.”
PPC is a 130-year-old company, points out Van Wijnen. “It’s a large company, so we need to make sure those controls are embedded throughout the organisation, from every site that we have up to the group administration office in Johannesburg. This is going to … [take] 12 to 18 months to get into a shape where we can say we’ve got it all 100% in order,” he tells The Africa Report.
Home market cement sales show impressive growth
On the operational side, “last year was a rollercoaster strange year, with the hard lockdown in South Africa,” according to Van Wijnen. The lockdown was in the first quarter of 2020, which affected South African sales in that period.
However, “if you look at the growth numbers thereafter [first quarter of 2020 in South Africa], they are probably the strongest across all our regions,” Van Wijnen said.
In year ended 31 March 2021, cement sales:
· In South Africa grew 6% supported by a surge in retail demand. More South Africans were in their homes because of the lockdown and had money in their pockets. Home improvements were the logical outlet for this excess cash.
· In Zimbabwe registered a 10% increase.
· In Rwanda rose 8% boosted by a large-scale schools build programme implemented by the government in the first quarter of 2020 to cushion the East African country’s economy from the impact of Covid-19.
All set for more infrastructure projects
In addition to rising cement sales in South Africa through the retail channel, “we’ve seen a number of government projects starting to come through,” Van Wijnen said.
If this is a sign to things to come from the South African government in terms of more infrastructure projects being implemented, “the only cement company that can easily ramp up its production is PPC,” according to Van Wijnen.
“We showed it last year when there was a spike in demand. We have two additional clinker lines that are in standby position. They are not running. But the moment we would need them, it’s a matter of switching them on. None of our competitors has that flexibility,” the CEO said.
The key benefit derived from infrastructure projects was that they tended to have a multiplier effect on the economy, said Goeller. This would help cement demand.
“Proper cement person”
Goeller also explained that over the years, GDP growth was the best predictor of cement demand. This suggested that when the South African economy grew, more cement was also being used.
Cement sales, in turn, were a good gauge for GDP growth, said Goeller. “Previously, when the cement industry used to publish their sales, that cement data gave a very accurate idea of what was going to happen in GDP growth,” Goeller said. The Competition Commission stopped the practice to stem cartel conduct from cement producers, and also ordered that the publication of the cement sales figures be delayed.
In terms of PPC, Goeller observes that in Van Wijnen, the company has “a proper cement person running the business, which you can’t say for maybe the last five PPC CEOs.”
“For the first time in a long time, you’ve got a normalised year. You’ve got good management. The company is sounding credible again. People can look at PPC without all of the internal noise it used to have. Now it’s a case of ‘if you think cement demand is going to grow, PPC is a good investment’,” says Goeller.
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