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BLUE:  13   0 (0.00%)  01/01/1970 00:00

BLUE FINANCIAL SERVICES LIMITED - Quarterly update

Release Date: 28/10/2015 10:00
Code(s): BFS     PDF:  
 
Wrap Text
Quarterly update

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”)

QUATERLY UPDATE

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”), 20 April 2015 (“April 2015 SENS”), 27 May 2015 (“May 2015 SENS”), 5 June
2015 (“June 2015 SENS”), 20 August 2015 (“August 2015 SENS”) and 28 August 2015
(“2nd August 2015 SENS”) whereby shareholders were updated on the developments
at Blue.


Current Trading Operations

Given the significant setbacks experienced by Blue during its turnaround journey,
specifically the undisclosed liabilities of R191 million, the Leonox matter again detailed
herein below, the decline of the credit market in South Africa and the legacy issues
surrounding Nigeria, Lesotho and Zambia, as addressed herein, the Company but
more specifically it’s various trading entities had, and still has no alternative other than
to use proceeds of its advances book to fund its operational activity and to manage
any and all cash flow mismatches accordingly. This process will continue until such
time as new funding can be injected and / or an alternative structure is put in place.

The Blue Group had the following as turnaround objectives:
1.    Reducing the cost base significantly;
2.    Changing the operating model from a centralised model to a decentralised one;
3.    Creating a track record of successful impairment management in respect of its
      lending products with new capital raised since December 2010;
4.    Migrating to a more robust loan platform; and
5.    Raising funding once the aforementioned objectives had been achieved.


The objectives as set out in 1 – 4 have been achieved and as such the Group has:
1.     created an efficient distribution- and collection infrastructure across the African
       continent on a localised (per country) basis;
2.     reduced the operating costs from 2011 by more than 80%; and
3.     achieved a low impairment on the loan assets produced on and after 1
       March 2011of less than 3%, equating to an impairment of less than 1% year
       on year.

The effort placed into developing the aforementioned infrastructure over the last three
and a half years has provided the Blue Group with substantial experience and
knowledge in respect of conducting a business as a micro lender in Africa.
With regards to objective number 5 above, Blue could not obtain support from key
shareholders to participate in a rights issue (or to raise any further funding from existing
and 3rd party funders) due to the lack of published financial information together with
the dispute with DRA Funders. Mayibuye had indicated that it would only be willing to
support a rights issue if a total of 75% of Blue shareholders participated in the rights
issue. As such, Blue is in the process of is exploring a new structure that may assist
with its funding needs for the short to medium term.

Lending Countries

The Company, through its subsidiaries, is currently trading and lending in Botswana,
Ghana, Malawi, Namibia, Swaziland, Uganda and Zambia providing mainly unsecured
payroll based loans, but also provides short term or payday loans to its customers.

Collections Countries

As previously advised in the April 2014 SENS the relevant subsidiaries have stopped
lending in South Africa and Lesotho and are only collecting the outstanding loan books.

Cessation of certain trading operations

As a direct result of the undisclosed liabilities that forms part of the warranty claim that
Mayibuye exercised in 2012 and as previously reported in the SENS of 6 November
2012, there were undisclosed taxation liabilities which presented an insurmountable
obstacle to the turnaround strategy for Tanzania and as previously reported in the May
2015 SENS, the trading entity in Tanzania has been placed into liquidation.

As per the May 2015 SENS, the Blue Group is also divesting from its operations in
Kenya caused by the same undisclosed taxation liabilities as referred to in respect of
Tanzania. In this regard the operations in Kenya may either be sold to a third party or
alternatively placed into liquidation. Shareholders shall be kept appraised on further
developments in this regard.

Although the Group is divesting its interest in Tanzania and Kenya, it maintains that
the East African Region offers viable opportunities and will continue to investigate and
consider future business opportunities in the region (if and when funding becomes
available and it is appropriate for Blue at that time).

Nigeria Investment

Shareholders are reminded of the April 2014 SENS and May 2015 SENS, whereby the
Company advised that the Nigerian Regulator disputed the extent of the Company’s
investment and resultant shareholding in Blue Micro Finance Bank in Nigeria (“Blue
Nigeria”) caused by transactions effected in 2008 and 2009 i.e. before the turnaround
started.

The Company’s shareholding in the aforementioned entity was finally settled at 8.3%.
This meant that Blue’s shareholding as reported at the Mayibuye subscription date
was decreased from 65% to 8.3%. This resulted in the Group having to derecognise
its Nigerian operation from its consolidation and report it as an investment.
Publication of Financial Information:

As previously advised, the Board has elected to publish the Company’s financial
results for the six months to June 2015 in the form of unaudited management accounts.
The management accounts will be published shortly.

The reasons for the delay in the audit has been addressed in the August 2015 SENS,
however, same can be summarised as follows:

To date the Company has been hampered in its efforts to publish financial information
since April 2013 as a consequence of several factors, including but not limited to the
following:

1.   Leonox-matter

     As previously reported the recapitalisation of the Blue Group by Mayibuye in
     2011, was premised and conditional on the conclusion of the Debt Rescheduling
     Agreement (“DRA”) and the Blue Claim Purchase Agreement (“BCPA”).

     The forensic event that came to the attention of the Company in April 2013
     (“Forensic Event”), led to Mayibuye, Old Mutual and the Company
     commissioning a forensic investigation by Horwath Forensics (“Horwarth”). The
     delay in the finalization of audited results of the Company mostly related to the
     uncertainty that the Forensic Event brought about.

     As reported in the April 2015 SENS, due to the complexity of the Forensic Event,
     the first forensic report took approximately 15 months to conclude and was
     issued in August 2014. Unfortunately, although this report allowed the Company
     further insight into the relevant matters it left sufficient grounds to believe that
     some further work was required to fully understand the relationship not just
     between the Company and Leonox Investments (Pty) Ltd (in liquidation)
     (“Leonox”), but also between Leonox and the Housing Impact Fund of South
     Africa (“HIFSA”) and various ancillary matters. As a consequence, several
     additional reports were commissioned by the Company from Horwath in order to
     clarify the outstanding aspects.

     As reported to the market in terms of the March 2015 SENS, June 2015 SENS
     and April 2015 SENS respectively, the subsequent forensic reports indicated that
     the Blue Group was not involved in the fraudulent transactions/activities forming
     part of the April 2013 forensic event (April 2015 SENS), but rather was a victim
     of the fraudulent actions committed. As a consequence of the fraudulent
     activities the Blue Group has suffered considerable damages and in this regard
     have taken the necessary action to recover such damages (refer May 2015
     SENS).

     One of the consequences of the fraudulent activities identified through the
     commissioned forensic reports was that the transfer of ownership in respect of
     the sale of assets by the Blue Group to Leonox, in terms of the funding structure
     put in place, never occurred. As a consequence, thereof, these assets had to be
     re-recognised in the books of the Blue Group (refer March 2015 SENS and
     June 2015 SENS).

     Due in large part to the aforementioned items on the financial position of the
     Company, it was unable to make significant progress with the audit until the final
     forensic reports were finalised. The last forensic report was only published in
     April 2015. Although the Company now has reasonable certainty on the way
     forward, there is still a number of cardinal issues that are subject to litigation and
     as such allowance needs to be made for the contingency that a court of law might
     have a different interpretation to that of the Company and its legal advisors.


2.   Debt Rescheduling Agreement

     As previously advised in the April 2015 SENS, the DRA is in effect a
     recapitalisation agreement. At the end date, the surfeit of assets versus liabilities
     is converted into equity at the Company level. Although the DRA was originally
     intended to have an end date three years after its conclusion, the signatories to
     the DRA have, under certain conditions, the right to accelerate the end date. The
     effect of accelerating 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. In
     terms of the notice, the end date was designated to be 6 September 2013.

     In terms of the DRA and the accelerated end date, the Company submitted to
     the lenders a Distribution/Conversion Plan in November 2013. Upon review of
     the Distribution/Conversion Plan the DRA lenders through the constitute Lender
     Committee, filed a notice disputing the contents of the Distribution/Conversion
     Plan. The basis for the dispute at the time was due to uncertainty in respect of
     the financial statements of the Blue Group as well as the consequent uncertainty
     regarding the figures provided in terms of the Distribution/Conversion Plan.

     In line with the provisions of the DRA, Deloitte, as the appointed auditors of the
     Company at the time, was appointed as the Transactional Auditor and tasked
     with review of the Distribution/Conversion Plan in order to provide resolution to
     the dispute filed.

     As a consequence of the uncertainties resulting from the Forensic Event and the
     consequent outstanding financial information, Deloitte was unable to fulfil its
     functions in this regard and the matter was tabled until finalisation of the forensic
     report. As reported herein below, Deloitte had subsequently advised that they
     would not be available for the 2013 audit and as such a new Transactional
     Auditor would need to be appointed.

     This matter is currently still unresolved. The Company will shortly submit an
     amended Distribution- and Conversion Plan to the DRA lenders based on the
     finalisation information now available to it.

     Once the Company have provided the amended plan, the DRA lenders will need
     to advise if they intend filing a fresh dispute in terms of the DRA or whether they
     will accept the consequences of the amended plan as presented to them.

3.   Finalisation of February 2012 Annual Financial Statements by Deloitte
     The financial results for the full year ended February 2013, the six months ended
     31 August 2013, the full year ended February 2014, the six months ended 31
     August 2014, the ten months ended 31 December 2014 and the six months
     ended 30 June 2015 are outstanding.
      The financial results are dependent upon Deloitte finalising the audits for certain
      of the African subsidiaries up to the end of the February 2012 financial year,
      which in some instances include audits of financial statements going back to
      February 2011, as well as the audit of the financial statements of the South
      African entities for the February 2012 financial year.

      Full details in respect of this and the relationship between the Company and
      Deloitte were provided in the 2nd August 2015 SENS. Since then there has been
      significant progress in respect of the finalisation of the audits although same has
      not yet been completed.

      Deloitte will remain appointed as the auditors for the full year ended 29 February
      2012 until the audits of certain subsidiary company annual financial statements
      have been completed.

Significant Events Since 2013

The Board wished to remind shareholders of the following significant events that took
place and were reported on since the Forensic Event:

1.    Voluntary suspension of Blue shares (June 2013 SENS)

      The Company applied to the JSE for the voluntary suspension of its shares from
      trading due to its inability to publish financial information based on significant
      uncertainties as stated above.

2.    Restructuring of Blue SA business model (October 2013 SENS)

      Restructuring of Blue Financial Services (South Africa) (Pty) Ltd (“Blue SA”)
      business model in order for Blue SA to focus on asset rehabilitation as the core
      of its business. This was done based on the economic climate in South Africa at
      that time, with consumers burdened by high levels of indebtedness, energy price
      increases and food inflation which negatively affected the micro finance industry
      in South Africa, and resulted in Blue SA no longer providing unsecured loans in
      South Africa.

      In this regard and to ensure the success of the refocused business strategy the
      Company, with agreement and contributions from Mayibuye, implemented such
      steps as were required to equip itself with the necessary staff, systems and
      processes to allow to focus on the rehabilitation of its assets.

      As a consequence of the fraudulent transactions/activities referred to earlier in
      this announcement, the Company will continue with the process in Blue SA of
      the recovery of its assets including continuing to pursue legal claims already
      instituted as well as instituting further claims to recover damages

     3. Shut down and discontinuance of certain non SA lending businesses and
        derecognition of a controlling equity stake (April 2014 SENS)

        During January 2013, the interest rates that are permissible to be charged in
        Zambia were significantly reduced by the Zambian Regulator. As a result, Blue
        took the strategic decision to close down one of its Zambian lending operations
        trading under the name and style of Nedfin Zambia which mainly focused on
        short term loans advances of less than three months. Blue continued trading
        through Blue Financial Services Limited Zambia.

     In Lesotho, Blue had been involved in continuous legal proceedings regarding
     the reinstatement of government payroll deductions. Based on a variety of
     circumstances, a strategic decision was taken to discontinue all lending in
     Lesotho, to fully impair the entire Lesotho book and to only focus on collecting
     the outstanding book in Lesotho. The Company is currently considering whether
     legal action should be instituted against the government of Lesotho in respect of
     damages suffered.

     With respect to the Nigeria operations, and the fact that the Nigerian Regulator
     disputed the extent of Blue’s investment and resultant shareholding in Blue Micro
     Finance Bank in Nigeria (“Blue Nigeria”), the Company took the decision to
     derecognise its controlling equity stake in Blue Nigeria into its Group results and
     to instead reflect its shareholding as an investment.

4.   Disposal of BAS Zambia (May 2015 SENS)

     Shareholders were advised that Blue Financial Services (Zambia) Limited (“BFS
     Zambia”) and Blue Employee Benefits (Botswana) Limited (“BFS Botswana”),
     wholly owned subsidiaries of the Company, entered into a sale agreement with
     Regent Life Botswana Limited to dispose of 100% in Blue Assurance Services
     (Zambia) Limited (“BAS Zambia”).

     As part of the restructure process announced in the SENS issued by the
     Company on 20 April 2015, the Group has decided to dispose of BAS Zambia
     which operates a long term insurance license in Zambia. BAS Zambia was the
     only long term insurance license holder in the Group and as such was not part
     of the Group’s core business.

5.   Rights Issue (March 2015 SENS)

     Shareholders are reminded that the group proposed to key shareholders to
     support a rights issue of R300 million as this was essential to ensure the
     sustainability of the Company. One of the key stumbling blocks to being able to
     proceed with the said rights issue was the dispute with the DRA funders (and
     lack of published financial information). As a consequence this strategy could
     not be continued.

6.   Alternative Funding Structure (April 2015 SENS)

     Shareholders are further reminded that Blue announced that it is exploring a new
     structure that can assist with its funding needs. An announcement in respect of
     this will be made once this funding structure has been finalised and ready to be
     implemented.

7.   Goodwill Impairment

     As per the April 2015 SENS a goodwill impairment to an aggregate amount of
     R396 million, mostly attributable to the impairment of goodwill previously carried
     in South Africa, Tanzania, Kenya, Botswana, Zambia, Namibia and Uganda was
     passed. Shareholders are reminded that in 2010 the goodwill was written down
     to R427 million from R750 million which the Company subsequently wrote down
     in 2013 to zero.

8.   Impairment on Loan Books

     As reported in the April 2015 SENS an increase in impairments of R308 million
     during the 2013 financial year on the advances book mostly as a result of
     impairments in South Africa, Lesotho and Zambia.

9.   Audit post 2012

a.   Statutory Audit of the South African Subsidiaries

     Deloitte are currently performing the final audit procedures on certain of the South
     African trading entities for the periods ended February 2010, 2011 and 2012. Upon
     finalisation of these procedures, the outstanding annual financial statements for
     financial periods up to and including February 2012 can be signed.

b.   Statutory Audit of the African Subsidiaries from February 2013 up to December
     2014

     A summary of the statutory audits of the African Subsidiaries from February 2013
     up to December 2014, as well as the relevant auditors appointed in respect of these
     audits and the respective status of these audits are provided below:


          Company               February 2013            February 2014         December 2014


          Blue Financial        UHY Voscon               UHY Voscon            UHY Voscon
          Services Ghana Ltd
                                Complete                 Complete              Complete
          


          Blue Financial        Grant Thornton           Grant Thornton        Grant Thornton
          Services Zambia Ltd
                                Fieldwork mainly         Fieldwork mainly      Fieldwork mainly
          
                                done.                   done.                 done.


          Blue Employee         BDO                      BDO                   BDO
          Benefits Botswana
          (Pty) Ltd             Fieldwork done           Fieldwork done       Fieldwork done
          
          
          Blue Kenya Ltd        Mbaya and               Mbaya and             Mbaya and
                                Associates              Associates            Associates
                                Fieldwork done          Fieldwork done        Fieldwork done

                                                                             (This currently
                                                                              remains a February
                                                                              2015 financial year
                                                                              end. Due to
                                                                              regulatory
                                                                              requirements this
                                                                              date can only be
                                                                              amended once
                                                                              previous AFS have
                                                                              been submitted.)


        Blue Employee           BDO                    BDO                    BDO
        Benefits Uganda
        Ltd                     In the process of      In the process of      In the process of

                                finalising the audit   finalising the audit   finalising the audit


        Blue Financial          Ernst & Young          Ernst & Young          Ernst & Young
        Services Malawi Ltd
                                Field work not         Ready for sign-off     Ready for sign-off
       
                                complete. Audit
                                anticipated to
                                commence on
                                9 November 2015


        Blue Financial          BDO                    BDO                    BDO
        Services
        Namibia (Pty) Ltd       Audit not yet          Field work mainly      Audit not yet
        
                                commenced. BDO         complete               commenced
                                awaiting Deloitte sign
                                off of 2012 and
                                resignation prior to
                                commencement
         
        Blue Financial Synergy  Synergy                Synergy                Synergy
        Services Swaziland
        (Pty) Ltd               Fieldwork completed.   Fieldwork completed.   Fieldwork completed.
          
         


        Blue Financial          Enslins                Enslins                Enslins
        Services Lesotho Ltd
                                Audit not yet          Audit not yet          Audit not yet
          
                                commenced. Awaiting    commenced.             commenced.
                                Deloitte sign off of   Awaiting Deloitte      Awaiting Deloitte sign
                                2012 and resignation   sign off of 2012 and   off of 2012 and
                                prior to               resignation prior to   resignation prior to
                                commencement           commencement           commencement


        Blue Financial
        Services
                                Nexia Baker and        Nexia Baker and        Nexia Baker and
        Mauritius Ltd
                                Arenson                Arenson                Arenson

                                Audit has              Audit has              Audit has
                                commenced.             commenced.             commenced.



c.   Group Consolidated Financial Statements for the 2013 financial year and
     subsequent periods

     The Company is still in discussions with SizweNtsalubeGobodo (“SNG”) to
     understand the best way of completing all subsequent consolidations (which is
     dependent on the outcome of their audit) in respect of the Group Consolidated
     Financial Statements for the 2013 financial year and subsequent periods.

     Shareholders are reminded that the finalisation of the subsidiary annual financial
     statements for periods up to December 2014 is imperative to enable SNG to
     proceed.

Going Forward:

Currently the Company is in ongoing discussions with stakeholders in order to ensure
that all possible alternatives and options – legal or otherwise - are considered and
investigated to ensure that the most appropriate course of action is implemented with
respect to the outstanding obligations of the Company and in best interest of the all
stakeholders.
Changes to the Blue operating model may be required to ensure that through a
proposed structure the Company and its various subsidiaries will continue providing
lending products to its customers.

The Group has started discussions with key stakeholders to establish support.

We anticipate to be able to advise shareholders shortly as to the outcome of these
discussions.

Shareholders are reminded that in the event that new capital is not injected and / or
the alternative structure as stated above is not supported, the Company will proceed
to settle outstanding obligations through the disposal of assets and trading entities as
previously stated.

Shareholders Meeting:

As previously indicated the Board of Directors intends to schedule an Annual General
Shareholders Meeting (“AGM”). The exact date is dependent upon the finalisation of
the audit of the financial statements for the relevant subsidiaries for the 2012 financial
year, the finalisation of the audit of the financial statements for the subsidiaries for the
subsequent periods and the finalisation of the audit on a consolidated basis for the
Company for December 2014. Shareholders will be kept informed.


Johannesburg
28 October 2015

Designated Adviser
Grindrod Bank Limited

Date: 28/10/2015 10:00:00 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,
 information disseminated through SENS.

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