Wrap Text
Operational update and renewal of cautionary announcement
BLUE FINANCIAL SERVICES LIMITED
Incorporated in the Republic of South Africa
Registration Number: 1996/006595/06
JSE Code: BFS
ISIN: ZAE000083655
(“Blue” or “the Company” or “the Group”)
OPERATIONAL UPDATE AND RENEWAL OF CAUTIONARY
ANNOUNCEMENT
Shareholders are referred to the announcements published on the Stock
Exchange News Service (“SENS”) of the JSE Limited (“JSE”) on 26 June
2013 (“June 2013 SENS”), whereby shareholders were advised of the
Company’s voluntary suspension of trading in Blue securities, 26 August 2013
(“August 2013 SENS”), 31 October 2013 (“October 2013 SENS”), 6
December 2013 (“December 2013 SENS”), 1 April 2014 and 30 April 2014
(“April 2014 SENS”), 30 September 2014 (“September 2014 SENS”), 30
December 2014 (“December 2014 SENS”), 31 March 2015 (“March 2015
SENS”) and the 20 April 2015 (“April 2015 SENS”), whereby shareholders
were updated on the developments at Blue. These SENS announcements
collectively dealt with the conversion of debt in terms of the debt rescheduling
agreement (“DRA”), the restructuring of Blue Financial Services South Africa
Proprietary Limited (“Blue SA”), the forensic investigations launched in 2010
and 2013 respectively, a trading and operation update, a cautionary
announcement, and the status of the financial results pertaining to the full
year ended February 2013, six months ended 31 August 2013, the full year
ended February 2014, the six months ended 31 August 2014 and the ten
months ended 31 December 2014.
In terms of April 2015 SENS shareholders were advised that initiatives were
underway to initiate a recapitalisation programme. It further indicated that it
was in the process of securing support in terms of a rights issue for at least
76% of the eligible voting rights by 30 April 2015.
The rights issue is essential to ensure the sustainability of the Company and
the purpose of this SENS is to update shareholders on progress and latest
developments pertaining to the Group.
Turn-around journey and background:
The turn-around journey and developments since the Mayibuye Group
Proprietary Limited (“Mayibuye”) equity take-over and reconstitution of the
board of directors in 2011 can be summarised as follows:
In April 2013, two years into the turnaround, the Group was well positioned for
growth after much was done to reduce the cost base and to introduce
processes and controls. In essence the turn-around journey was
predominantly completed with only the need to raise additional capital and
debt to fund growth being outstanding.
This state of readiness was achieved despite early setbacks as follows:
- R191 million of undisclosed liabilities were discovered soon after the take-
over in early 2011. As part of the subscription agreement the Group was
liable in terms of warranties to settle this obligation. It was finally settled at
circa R150 million and it issued shares at the time with an effective
settlement value of R80 million. The majority of these undisclosed
liabilities were made up of deemed taxes, never accounted for in the
Africa subsidiaries. Consequently, the Group embarked on a voluntary
disclosure programme in an attempt to regularise the situation and
achieve compliance. These undisclosed taxes were also one of the main
reasons for voluntary liquidation of the Tanzania trading entity and the
current process to terminate the Kenya trading entity.
- In addition, the unsecured lending industry in South Africa started to
experience the effects of an over traded environment, and the Company
was impacted in the sense that it had to raise significant impairments on
its South African advances made specifically prior to the start of the turn-
around journey. It was also decided to stop new lending in South Africa
and to rather focus on recovery of its loan book in South Africa.
- The group had two operating entities in Zambia historically and based on
the effects of the reducing margins in Zambia, decided to merge these
two entities into one.
- The Nigerian operation was the subject of much controversy and the
Central Bank of Nigeria, based on the actions prior to the turn-around
started, refused to recognise the Groups 65% equity interest. This was
finally settled at 8,9% which had the result of the Group having to de-
recognise its Nigerian operation from its consolidation.
- There was a long outstanding legal dispute in Lesotho that started prior to
the turnaround journey. The net result of this was that a provision had to
be raised against the entire book in Lesotho based on actions taken by
the Government of Lesotho.
In April 2013 the Group was in the final stages of concluding a partial credit
guarantee for R500 million for a capital raising program of R2 billion. This
would have allowed the Group to fully utilise its infrastructure and leverage its
extensive African footprint, resulting in profitable trading and the creation of
value for all stakeholders. It was further in discussion with Mayibuye to further
recapitalise the Group.
The forensic event in respect of Leonox Investments Proprietary Limited that
came to light in April 2013 has inter alia the following effects:
- Introduction of significant doubt and uncertainty in respect of the 2013
audit that was close to completion
- The Company requested the JSE to voluntarily suspend trading in its
shares.
- Consequently the partial credit guarantee as well as recapitilization could
not be pursued further;
- The Group financial director also resigned at this time;
- Charges were filed with the Directorate of Priority crimes.
Shareholders are reminded of the trading update published in the April 2015
SENS. The key factors contributing to the losses made in 28 February 2013
are the impairments on the South African, Lesotho and Zambian advances.
The goodwill impairment is caused by a reducing free cash flow in such
operating entities which can be directly coupled with the R500 million funding
facility not being concluded.
Given the above context, and the low probability of attracting new funding at
that time, the Company was required to focus its resources on both forensic
investigations and further cost reductions.
Based on damages established in terms of the first forensic investigation
instituted action against ABSA bank for R35 million
The second forensic investigation has lead the group to institute legal action
against HIFSA (“Housing Impact Fund of South Africa”) for R209 million.
The benefit of the Company focussing its resources on both forensic
investigations and further cost reductions in context of the realities, is
evidenced in the much improved results of the Company for the years ended
28 February 2014 and 31 December 2014 as published in the April 2015
SENS.
Nevertheless, during this time the Company had, and still has no alternative
other than to use proceeds of its advances book to fund its operational activity
and to manage any cash flow mismatches accordingly. This process places
constraints on the cash flows of the business and negatively impacts the
advances book and the Company will continue to use the proceeds of its
advances book to fund its operational activity and to manage any cash flow
mismatches as far as it possibly can until such time as new funding can be
injected.
In light of the above sequence of events and the impact it had on the Group,
the current state of affairs and recent developments can be summarised as
follows.
Capital position:
After two years the Group is back at the point of needing to raise capital and
debt as more fully set out in this and prior announcements.
A recapitalisation programme of at least R750 million is required to facilitate
the sustainability of the Group.
The preferred way forward is to proceed with a recapitalisation programme of
R750 million which will result in a positive NAV sufficient to facilitate
sustainability. This process will reduce debt and raise new cash for growth.
The R750 million recapitalisation programme consists of the previously
reported Debt Rescheduling Agreement (“DRA”) debt to equity conversion of
R468 million and a rights issue of R282 million, explained in more detail below
under separate headings.
- DRA Debt to equity conversion – R468 million
As was disclosed in the April 2015 SENS the DRA is a recapitalisation
agreement with certain terms and conditions. At the end date, the surfeit
of assets versus liabilities is converted into equity at the Company level.
The funders and signatories to this agreement have under certain
conditions the right to accelerate the end date. The effect of the
acceleration of the end date is that the conversion of the surfeit of assets
versus liabilities is accelerated.
In August 2013, the Company received notice from the lenders under the
DRA of their intention to accelerate the end date of the agreement. In
terms of this notice, the end date was designated to be 6 September
2013.
Based on the financial results, a full conversion to equity of all remaining
DRA liabilities is required which will result in a debt to equity conversion of
R468 million.
It should be recorded that the DRA participants have filed a dispute on
how the conversion calculations have been done and certain of these
participants have also filed legal claims.
A key condition to the above recapitalisation programme being successful
is that the DRA funders must abandon their disputes and proceed to
convert their debt to equity.
In an attempt to bring matters to closure it has been agreed that the DRA
participants will advise Blue of their decision by 28 May 2015, and the
agreement is that should there be no decision by that date, it will mean
that they are not willing to participate in the conversion or follow their
rights in terms of the rights issue.
Shareholders are reminded that Mayibuye have anti-dilution rights and
therefore the shares that will be issued in terms of the DRA debt to equity
conversion will be double the required new shares to be issued due to
Mayibuye’s anti-dilution rights. This will imply that existing shareholders
will effectively, from 6 September 2013, have been diluted as such even
though the shares have not yet been issued due to the dispute.
- Rights Issue – R282 million
Mayibuye have advised that in principle it will follow its rights but only if
76% of the other shareholders also follow their rights.
Should the DRA participants decide to participate as explained above, the
Company expects to have a final answer from the other stakeholders with
regards to the rights issue by the end of the first week of June 2015 and
the Company will therefore be in a position to advise the market
accordingly of the outcome by 5 June 2015.
Core Investments:
There are six Africa subsidiaries or trading entities with a combined positive
NAV and the ability to be sustainable provided the immediate introduction of
new high yielding products together with the injection of new capital.
The preferred option is to retain and grow these investments, leveraging the
recapitalisation programme explained above.
Blue Financial Services South Africa Proprietary Limited (“Blue SA”):
Blue SA remains with an advances book and certain legal damages claims as
more fully explained in the April 2015 SENS.
The Company will continue with the process in Blue SA to ensure the
recovery of its assets including continuing to pursue legal claims already
instituted as well as instituting further claims to recover damages.
Non-core Africa investments and minority shareholdings:
The non-core subsidiaries include Swaziland, Lesotho and Kenya with small
(less than 10%) minority stakes in Nigeria and Zimbabwe.
Irrespective of the outcome of the recapitalisation programme the above
remaining investments will be disposed of.
Audit Update:
The Group has 20 sets of individual subsidiary annual financial statements for
financial years ended February 2010 to February 2012 (6 South African sets,
11 sets in Rest of Africa excluding Mauritius, and 3 Mauritian sets) that
require completion. The Group results for the same financial periods were
signed off by the Board and the auditors on the basis of statutory audits
completed at that time. The actions required to finalise the non-South African
subsidiary annual financial statements are administrative in nature for the
periods up to February 2012. Further audit work may be required on the
South African sets of annual financial statements as a result of the forensic
investigations. Currently none of the above represent scope restrictions or
fundamental disagreements with the auditors.
The Group has proactively engaged new audit firms in the rest of Africa to
conduct the audits for the financial years ended February 2013, February
2014 and December 2014 and they have commenced with audit fieldwork on
this basis. In a similar manner the Group has engaged a new audit firm in
South Africa to assume the audits of the South African entities as well as the
consolidated annual financial statements.
Finalisation of the subsidiary annual financial statements for periods February
2012 and prior is imperative to enable the replacement auditors to be legally
appointed, and for them to conclude the audits for the financial periods ended
February 2013, February 2014 and December 2014, and consequently the
consolidated annual financial statements
Extra Ordinary Shareholders Meeting:
The Board will, subject to regulatory approval, call for an Extra Ordinary
Shareholders meeting within the next 3 (three) months to update shareholders
on relevant agenda points and related resolutions.
In Closure
The Group is well positioned to grow its core investments. It is however
imperative that the recapitalisation programme succeed to enable that growth.
In the event that the recapitalisation programme does not proceed, the
Company will proceed to settle outstanding obligations through the disposal of
assets and trading entities.
Renewal of Cautionary Announcement
Further to the April 2015 SENS, shareholders are hereby advised that the
recapitalisation programme, rights issue and the discussions engaged in are
still ongoing and may have a material effect on the price of the Company`s
securities.
Accordingly, shareholders are advised to continue to exercise caution when
dealing in the Company`s securities until a further announcement is made.
Johannesburg
27 May 2015
Designated Adviser
Grindrod Bank Limited
Date: 27/05/2015 11:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
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