Troubled Tongaat Hulett, the sugar and property group, has announced that it has entered business rescue due to its snowballing debt burden and that it was denied additional funding.
However, it said its other operations would continue to trade uninterrupted.
Business rescue is a legal process aimed at facilitating the rehabilitation of a financially distressed company.
Tongaat sits with a R6.6 billion debt burden.
It said in a statement that its company’s debt levels remained well in excess of what could be serviced, that delays experienced in the recapitalisation had worsened the situation, and that a debt restructuring plan to address both the excess debt and a R1.5bn shortfall in working capital facilities was approved by the Tongaat Hulett board of directors and submitted for consideration to the relevant stakeholders.
“The extent of the challenges faced by the company and its current strained financial position are well publicised and arose from years of high and increasing debt levels, alleged financial misstatements and historic mismanagement under previous leadership. These factors have resulted in the loss of significant value for shareholders,” the firm said.
Last week Tongaat, led by CEO Gavin Hudson, said its board of directors had approved the capital restructuring plan.
Only last month Tongaat said it had asked the JSE to lift its share suspension.
The firm has been battling to get back on its feet since 2019.
At that time a new leadership team and board were introduced and the company introduced a turnaround strategy to address the challenges it faced.
Tongaat explained that while good progress had been made on a variety of fronts, this hadn’t been enough.
For example, it had realised cost savings and improved liquidity management. Its debt had been reduced by more than R6.6bn from a high of R11.7bn through the selected sale of non-core and, in certain instances, core assets.
“Despite the good progress on debt reduction initiatives, Tongaat Hulett remains unable to service its residual debt, the majority of which (87%) is carried by the cash flows of the South African sugar operation, the property business and dividends and operational support fees received from the non-South African sugar operations,” Tongaat explained.
But it said recent monetary policy changes within Zimbabwe had also impacted sugar prices and cash flows, limiting the availability of surplus cash for dividend distribution, while the repatriation of funds from Mozambique was prohibited by the in-country debt agreements.
The South African turnaround efforts were also hampered more recently by the Covid-19 pandemic and the riots and floods in KwaZulu-Natal. Operational headwinds were encountered in the form of the sugar loss at the refinery and poor milling performance, which revealed inadequate historic plant maintenance.
In addition, at the end of the 2022 financial year, the working capital requirements of the South African sugar operation increased significantly with slower-than-expected sugar sales and a normalisation of inventory levels post the refinery loss.
“The factors described above have placed significant pressure on the company’s liquidity and have contributed to a shortfall in the company’s working capital facilities necessary to fund the peak working capital funding requirements to complete the 2023 financial year.
“The financial position continues to worsen, with interest accumulating on the excess debt balances. This position has been exacerbated by delays experienced in the recapitalisation of the company, particularly the planned equity capital raise (rights issue) which failed in June 2022, due to regulatory and other requirements,” it said.
The board said it believed it would have been possible to restructure the company’s affairs and implement a debt restructuring plan, provided that adequate bridge funding was available to meet the peak working capital requirement for the 2023 financial year and to allow the completion of the off-crop programme for the following season (as payment terms for such programme extend into the 2024 financial year).
However, it explained that it was forced to enter business rescue as the operational and cash-flow performance of the company’s South African sugar operations has exceeded expectations, and the Zimbabwe sugar operation had started to remit fee income to the company.
“Notwithstanding these positive outcomes, due to delays in concluding property sales and higher restructuring costs, the company has only managed to defer the onset of the liquidity shortfall and not reduce the peak funding requirement.
“Efforts to raise the balance of the funding requirement through the disposal of assets or from existing shareholders have not been possible in the time available, particularly with the shareholder approvals that would be required,” it said.
Tongaat said it had also initiated engagements with other potential funders outside the existing lender group and, while initially positive, these efforts did not culminate in additional funding becoming available.
The South African lender group has remained supportive of the company and has worked constructively with management over the past three and a half years to assist the company in addressing its liquidity constraints. In this regard and to assist towards a R1.5bn working capital shortfall, the lenders advanced a new short-term borrowing base facility of R600 million on July 29, 2022, which was now due for repayment.
In the absence of alternative sources of funding, Tongaat had requested the South African lender group to consider providing the additional necessary funding required to support the implementation of the restructuring plan.
“The South African lender group has informed the company that in all of the circumstances of the restructuring plan, they are unable to support the restructuring plan or to provide the additional funding required. Consequently, the repayment date of the borrowing base facility will not be extended,” Tongaat said.
“Without the required additional funding, and an extension of the repayment date of the borrowing base facility, and having taken extensive legal advice, the board has determined that Tongaat Hulett is facing circumstances constituting ‘financial distress’ within the definition contained in section 128 of the Companies Act 71 of 2008 (“Companies Act”).
“The board, in the interests of all stakeholders, has resolved to commence with voluntary business rescue proceedings for the company, as provided for in terms of section 129 of the Companies Act.“
The board said it believed that this action was the most responsible in the circumstances and was reasonably likely to result in a better return to creditors than a liquidation.
Due to the dependency of Tongaat Hulett Developments Proprietary (THD) on the company for its funding, THD had also commenced voluntary business rescue proceedings.
Tongaat Hulett’s Botswana, Mozambique and Zimbabwe sugar operations were not financially distressed and won’t presently continue trading in the ordinary course. These three businesses were funded independently from the company and should be largely unaffected by the adverse circumstances affecting the company, Tongaat said.
The board had appointed Trevor Murgatroyd, Peter van den Steen and Gerhard Albertyn of Metis Strategic Advisors as the business rescue practitioners of Tongaat and THD.
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