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BLUE FINANCIAL SERVICES LIMITED - Market Update

Release Date: 15/11/2017 16:05
Code(s): BFS     PDF:  
 
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Market 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”)


Shareholders are referred to the announcement published on the Stock Exchange News
Service (“SENS”) on 26th June 2013, whereby shareholders were advised of the Company’s
voluntary suspension of trading in Blue Securities, as well as the various quarterly updates
and other announcements published on SENS since then, the last being 2nd of February 2017,
whereby shareholders were updated on the developments at the Company.

High level overview

1. In summary, it can be said that the Blue Group has been a group in distress caused by
   events that started even before it listed on the JSE on the 11th of October 2006.
2. The issues culminating in its collapse commenced pre-listing and finally cumulated in the
   ill-fated Credit U-transaction in December 2008. The Credit U-transaction caused, on its
   own, an economic loss for the Company of circa R500 million.
3. The history of the Company to date can be classified as follows:
   3.1. The first phase commenced from the listing of the Company in October 2006 to Blue’s
          reported collapse in February 2010;
   3.2. The second phase commenced with the Mayibuye 2010 recapitalization (“Mayibuye
          Plan”) and the appointment of a new board of directors in December 2010 as has
          been previously reported in various SENS announcements;
   3.3. The third phase or current phase commenced with the failure of the Mayibuye Plan
          resulting from certain participating funders from the first phase repudiating the
          recapitalization agreements with significant consequences to all stakeholders.
4. The Company is as such at present focusing its efforts to ensure that:
   4.1.     All litigation is driven to finality; and
   4.2.     All debt is paid in a responsible manner.
5. Once completed, the future of the Company can be decided by its stakeholders.



The following remaining matters, originating from the events and actions, pre-the
Mayibuye Plan, still remain unresolved and impacts on the current position
6. Blue Cell – Mostert
   6.1.     In 2006 the Company, under the leadership of Dave van Niekerk (“van Niekerk”),
            the then CEO of the Company, concluded an agreement with one, Wayne Mostert
          (“Mostert”), in respect of a joint venture that would be encapsulated in a company
          by the name of Blue Cell (Pty) Ltd (“Blue Cell’).
   6.2.   Mostert alleges that based on:
          6.2.1. The Company’s withholding of further funding to Blue Cell;
          6.2.2. The filing of a winding up application for Blue Cell in 2007; and
          6.2.3. Alleged perjury committed by Wessel Smit in 2007, the previous Legal
                 Director of the Company, in the course of deposing to certain affidavits
                 forming part of the pleadings;
          he is entitled to claim the issuance of shares from the Company to the value of
          approximately R34 million in the Company, alternatively payment of the
          aforementioned amount.
   6.3.   This matter is enrolled for hearing on the 8th of March 2018.


7. Single Stock Futures (“SSF”)
   7.1.   When the financial markets collapsed in 2008, it led to a significant liability due by
          van Niekerk and Riaan Swart to ABSA as a consequence of SSF.
   7.2.   In its court papers, the Company’s position is that Van Niekerk allegedly made false
          representations to ABSA, amongst others, that the Company was indebted to him
          to a value of R35 million which loan account was ceded to ABSA as security for
          these loans. The Company having been misled to believe that it was indeed liable
          to van Niekerk, proceeded to make payment to ABSA of the amount of R35 million
          during or about March 2009.
   7.3.   This matter is enrolled for hearing on the 3rd May 2019 although the Company has
          requested for an earlier preferential date to be allocated to it.


8. Unpaid and Undisclosed and Unrecorded Obligations as at December 2010
   8.1.   Undisclosed direct and Indirect taxation in the form of Income Tax, Withholding Tax
          and VAT on imported services as well as penalties and interest for non-payment of
          these taxes amounted to more than R125 million as at February 2011 to which
          significant further claims in other jurisdictions for the same periods were uncovered
          even later.
   8.2.   These non-disclosures ultimately resulted in the termination of the operations in all
          of the East African operations being Kenya, Tanzania and Uganda and the crippling
          of growth in Botswana, Namibia and Zambia.
   8.3.   The remaining unresolved outstanding taxation issues are:
          8.3.1. Namibian Revenue Authority - The Company is currently in discussions with
                 the Namibia Revenue Authority to settle this.
          8.3.2. Botswana Unified Revenue Service –             The Company is currently in
                 discussions with the Botswana Unified Revenue Services to settle this
          8.3.3. South African Revenue Service – The Company is engaging with SARS to
                 come to a resolution.


9. Overvalued assets as at December 2010
   9.1.   The material and significant reduction of financial assets, flowing from:
          9.1.1. Loan book reductions caused by:
                 9.1.1.1.     the overcharging of interest in Lesotho and Namibia;
                 9.1.1.2.     overstating the South African and Botswana loan books;
          9.1.2. Reversal of artificially created profits in Nigeria and further all loan advances
                 to Nigeria had to be written off due to regulatory noncompliance.
   9.2.   The last of these issues that we are attempting to resolve is with the Namibia
          Regulator in respect of the overcharging of interest in the 2009 year, which in terms
          of the company’s records, have since been fully refunded to customers.



Recapitalisation of Blue in December 2010
10. Mayibuye Plan and recapitalisation agreements
   10.1. The terms of the Mayibuye Plan and recapitalisation agreements are recorded in
          the Subscription Agreement, Debt Rescheduling Agreement (“DRA”) and the Blue
          Claim Purchase Agreement (“BCPA”) details in respect of which have been set out
          in previous SENS announcements.
   10.2. The recapitalisation of the Blue Group anticipated a maximum amount of:
          10.2.1. R163 million via the subscription of shares by Mayibuye in the Company
                 which was concluded and paid on the 10th of December 2010. These funds
                 were ring fenced in terms of the DRA and not part of assets that the DRA
                 funders could be paid from; and
          10.2.2. R1,175 billion via conversion of debt to equity in terms of the DRA. In this
                 regard:
                 10.2.2.1.    Firstly, the debt amount to be converted into equity in terms of
                              the final analysis was 100%. The total debt amount converted to
                              equity prior to the End Date of the DRA was R700 million. In
                              addition, a further debt amount of R230 million was
                              derecognised as a liability post the End Date in terms of the
                              DRA.
                   10.2.2.2.   Secondly two of the funders (“DRA Repudiators”), had debt
                               payable to them respectively in terms of the DRA by the Blue
                               Group in the aggregate amount of R243,894,000. It is the
                               Company’s position that the DRA Repudiators repudiated the
                               agreement by refusing to participate in the DRA process and
                               instituting legal action against the respective Borrowers. The
                               matters have been enrolled for hearing at different times in
                               different countries.
11. Leonox Investments (Pty) Ltd (in liquidation) (“Leonox”):
   11.1. The Blue Group has also instituted legal action against Leonox and HIFSA.
   11.2. Discussions are currently ongoing between the parties.


12. Rights Issue
   12.1. Between April 2014 and May 2015, the Blue Group approached various key
          corporate shareholders and stakeholders, including lenders under the DRA, to
          establish if they were prepared to participate in recapitalizing the business of the
          Blue Group through a rights issue process.
   12.2. The basis for the rights issue was that the underlying business of the Blue Group is
          sound and the Blue Group require capital to:
          12.2.1. grow the loan books and to further the ongoing litigation; and
          12.2.2. assist with general working capital; and
          12.2.3. enable the Blue Group to commence development and implementation of a
                   new loan system. As the Blue Group had to continue to maintain its existing
                   loan book in order to ensure that it was able to continue to pay its operating
                   expenses, the need arose for the Blue Group to replace its loan system due
                   to various reasons ranging from technical reasons to the inability to support
                   the aging system
   12.3. The proposal was that once the audits are completed, the rights issue should be
          initiated. The business would have been split into two in order to allow the
          outstanding issues to be ring fenced and resolved separately from the normal
          operating business. The Company had lined up a major auditing practise and law
          firm who were prepared to do this, in the event that the rights issue was agreed to.
   12.4. None of the shareholders, other than Mayibuye, were prepared to support with the
          rights issue, and it was therefore abandoned.


13. Bridge Finance
   13.1. After the failure of the proposed right issue, the board again approached key
          shareholders to establish if they would be prepared to provide bridge financing.
   13.2. Again, the only stakeholder prepared to provide support were Mayibuye related
          entities.

Settlement Agreement of Related Party Debts
14. The Blue Group is indebted to Mayibuye and other related parties (“Mayibuye”) in the
   amount of R148,273,091.20 (“Mayibuye debt”). To date, Mayibuye has a total exposure of
   R311,273,091.20 to the Blue Group that is constituted by an equity investment of R163
   million and Mayibuye debt of R148,273,091.20.
15. As a consequence of repudiating DRA funders’ actions, Mayibuye called up the Mayibuye
   debt and perfected all its securities as inter alia recorded in various SENS announcements
   since August 2015.
16. The repayment process has commenced.



Way Forward
17. Status on Audits
   17.1. The current status of the remaining outstanding audits are as follows:
          17.1.1. Blue Financial Services Namibia (Pty) Ltd: BDO has completed the audits
                   up to and including the 2015 financial year. Once 2015 has been signed, it
                   is anticipated that the December 2016 audit will commence shortly.
          17.1.2. Blue Employee Benefits (Pty) Ltd Botswana: BDO has completed the audits
                   up to and including the financial year ending December 2016. Once signed
                   the financials will be up to date.
          17.1.3. Blue Financial Services (Malawi) Ltd: The December 2014 financial year it
                   is hoped will be resolved by end of December 2017.
          17.1.4. In respect of the South African Entities we have agreed with Deloitte SA that
                   they will commence the 2012 audits in November 2017.


18. Rights Issue
   18.1. The rights issue for R100 million as contemplated in 2015, will again be proposed
          to shareholders in the first half of 2018. Such a rights issue will only be done once
          there is more certainty on a number of the issues as raised above.
   18.2. It is the Company’s view that the proposed process will be in the best interest of all
          stakeholders in Blue.


   15 November 2017

Date: 15/11/2017 04:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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