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Debt restructure and introduction of a R40 million subordinated loan from Paladin Labs Inc.
LITHA HEALTHCARE GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2006/006371/06)
Share code: LHG
ISIN: ZAE000144671
(“Litha” or the “Company”)
DEBT RESTRUCTURE AND INTRODUCTION OF A R40 MILLION SUBORDINATED LOAN FROM
PALADIN LABS INC.
1. INTRODUCTION
Litha shareholders (“Shareholders”) are referred to note 9 of the Company’s reviewed
condensed consolidated financial statements for the quarter and year ended 31 December 2013
(“2013 Financial Results”) published on the Stock Exchange News Service on Friday,
7 March 2013 informing Shareholders of, inter alia, negotiations with FirstRand Bank Limited
(“FRB”) (FRB acting through its Rand Merchant Bank division) (“RMB”) pertaining to a potential
restructure of the Company’s existing funding arrangements.
The board of directors of Litha (“Board”) is pleased to announce that it has agreed to the
following:
- amendments to certain key terms of the current funding arrangements held by Litha and
its subsidiaries (the “Group”) with FRB (“Current Funding Arrangements”), including
the relaxation and amendment of certain financial covenants, as more fully set out
below; and
- a R40 million loan from Paladin Labs Inc. (“Paladin”) to the Company, fully subordinated
in favour of FRB (“Paladin Loan”), as more fully set out below,
collectively referred to as the “Debt Restructure”.
2. INFORMATION PERTAINING TO THE GROUP’S CURRENT FUNDING ARRANGEMENTS
The Group has, inter alia, the following Current Funding Arrangements:
- an R80 million medium term loan facility, pursuant to an agreement entered into
between Litha Medical (Proprietary) Limited (a wholly owned subsidiary of Litha) and
RMB on or about 12 May 2011 (as subsequently amended);
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- a R91 million credit facility, pursuant to an agreement entered into between certain of
the Group companies and FRB; and
- 125 000 cumulative, redeemable no par value preference shares issued to RMB for an
amount of R125 million, pursuant to a preference share subscription agreement entered
into between Litha and RMB on 29 June 2012,
collectively, the “Funding Agreements”.
The indebtedness to FRB under the Funding Agreements as at 31 December 2013 amounted to
R215 188 938.
3. RATIONALE FOR THE DEBT RESTRUCTURE
The Funding Agreements contain various financial covenants customary to facilities of this nature
(“Financial Covenants”).
As stated in the 2013 Financial Results, ZAR devaluation and challenging economic conditions
have beset the South African medical and pharmaceutical supplies industry and, as a result,
have adversely impacted the Group’s recent financial results and therefore adversely affected
the ability of the Group to continue to comply with the existing Financial Covenants in the short to
medium term.
The Board proactively identified the requirement to secure the Debt Restructure, so as to avoid
the risk of a potential breach of the Financial Covenants.
The Debt Restructure will provide the necessary headroom to ensure continued compliance by
the Group with the Financial Covenants (as amended, pursuant to the implementation of the
Debt Restructure) and the Board is confident that the Debt Restructure appropriately addresses
the Group’s borrowing risk profile in the short to medium term.
The Debt Restructure, and Paladin’s significant contribution to same, further confirms the
continued and pro-active support from Paladin, Litha’s controlling shareholder holding more than
70% of Litha’s issued ordinary share capital, whilst the aforementioned challenging economic
conditions persist.
4. SALIENT TERMS OF THE DEBT RESTRUCTURE
4.1 Amendments to the Funding Agreements
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The Funding Agreements have been amended to relax various debt service cover ratios,
as well as the net debt to equity ratio and minimum tangible equity balance (“Covenant
Relaxations”). These Covenant Relaxations will provide the necessary headroom referred
to in paragraph 3 above.
The Covenant Relaxations have been granted by FRB conditional upon a Shareholders'
equity injection in an amount of no less than R40 million, to be implemented by way of (i)
an injection of new shareholder funds through a subscription for new Litha shares or (ii) a
fully subordinated shareholder loan to Litha (“Equity Cure”).
The Board has resolved to introduce the Equity Cure in the form of the Paladin Loan, as
opposed to an issue of new Litha shares to Shareholders, inter alia, for the following
reasons:
- the Board believes that the 2013 Financial Results do not represent an accurate
reflection of the medium to long term prospects of the Group, however these results
adversely impact the measurement of current and ongoing Financial Covenants and
will continue to do so for the remainder of calendar year 2014, given that certain
Financial Covenants are measured on a rolling twelve month basis;
- the Board believes that the impact of the 2013 Financial Results on Litha’s share
price, particularly in light of the recent decline in Litha’s share price subsequent to the
publication of these results, does not support an equity issue (which will further dilute
earnings and headline earnings per share) during a period when such an issue will
occur at an inefficient current share price / potential issue price and particularly during
challenging economic circumstances (as outlined in paragraph 3 above); and
- the Debt Restructure has to be implemented as a matter of urgency, accordingly, it is
impractical to pursue a timely new equity issue.
It is furthermore impractical for Litha to secure shareholder loans from a broad base of
Shareholders in a manner that will satisfy the requirements of an Equity Cure and to do so
within the timing constraints arising from the urgency of the Debt Restructure.
The Board therefore supports the Paladin Loan as representing the most efficient and
pragmatic manner of satisfying the requirement for an Equity Cure, thereby appropriately
addressing the Group’s borrowing risk. Accordingly, Litha has concluded and implemented
the Paladin Loan, on the terms and conditions set out in paragraph 4.2 below.
4.2 Paladin Loan
The Paladin Loan has been implemented by way of the following:
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- a R40 million loan agreement, entered into between Litha and Paladin on 11 April
2014 (“Loan Agreement”); and
- a subordination agreement, entered into between Litha, Paladin and FRB on 11 April
2014, whereby the Paladin Loan has been fully subordinated in favour of FRB, both in
respect of interest and capital repayments, until such time as the Group’s
indebtedness under the Funding Agreements has been fully discharged (“Discharge
Date”).
The Paladin Loan will be utilised to fund the Group’s working capital requirements. Interest
will accrue from the date on which the Paladin Loan is advanced at a rate equal to the 3
month JIBAR plus 6% (which rate equated to 11.75% as at 11 April 2014), compounded
quarterly in arrears. Interest will be capitalised prior to the Discharge Date and will be paid
quarterly after the Discharge Date. The Paladin Loan, including unpaid interest capitalised
prior to the Discharge Date, will be repaid after the Discharge Date on the earliest of (i) the
Board resolving to repay the Paladin Loan and (ii) the fourth anniversary of the Paladin
Loan advance date.
The Loan Agreement contains various warranties, representations and undertakings
customary to a funding arrangement of this nature. Furthermore, it is an undertaking in the
Loan Agreement that the Board shall propose an amendment to the Company’s
memorandum of incorporation, so as to restrict the Board's ability to incur any further debt
on behalf of the Group without the prior approval of Shareholders by way of an ordinary
resolution (“MOI Amendments”). Shareholders will be advised of the detailed MOI
Amendments in due course. The MOI Amendments will require Shareholder approval and
a circular containing further information on the MOI Amendments will be sent to
Shareholders, inter alia, for purposes of convening the requisite Shareholders’ meeting.
4.3 Status of the Debt Restructure
The various agreements and addenda to the Funding Agreements required to give effect
to the Debt Restructure and the various components thereof as outlined in this
announcement, have been entered into and have become unconditional and Litha has
received the R40 million Equity Cure via the implementation of the Paladin Loan.
The Board is pleased to announce that the Debt Restructure has therefore become
unconditional and has been fully implemented.
Sandton
15 April 2014
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Corporate Advisor, Transaction Sponsor and JSE Sponsor to Litha:
One Capital
Attorneys to Litha:
Cliffe Dekker Hofmeyr Inc.
Attorneys to Paladin:
Werksmans Inc.
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Date: 15/04/2014 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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