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| Market chaos threatens BEE October 9, 2008 By Mzwandile Jacks and Lucky Biyase Johannesburg - Black economic empowerment (BEE) investors have seen hundreds of millions of rands wiped off their equity values because of recent market disruptions. Corporate finance experts and analysts confirmed yesterday that the market turmoil would make it tougher for new BEE deals to be concluded using third party funding. Banks had adopted stricter lending criteria in light of market volatility, they said. Some BEE investors would be hard hit because of the debt they incurred in striking deals. This would make their equity exposure more sensitive to share prices, said analysts. All market sectors have been affected, with resources hard hit in recent weeks. Imperial, MTN, Barloworld, Sasol and Old Mutual have been identified as high-profile companies whose BEE deals were either already in distress or were headed for trouble. One expert said that because local retail banks put third party debt in their deals, BEE transactions such as those conducted by Standard Bank, Absa and Nedbank could be derailed. The sharp fall in the prices of platinum mining shares meant BEE deals in this sector could also be in trouble. Platinum continued to fall early this week as a global recession began to look possible. Demand for the metal fell as vehicle makers cut production. James Formby, the head of corporate finance at Rand Merchant Bank, said that in cases where the value of the debt outstanding exceeded the value of the shares given as security, funders would need to call in loans. "As depositors in these banks, we would consider it irresponsible if they did not. This will lead to an unwinding of these deals unless either the corporate or the BEE company is prepared to put in some more security," Formby said. "Clearly, there is a lot at stake for all parties to make these transactions work. Other transactions that have not used funding could also be affected. "For example, the Absa transaction is an option structure, where the option needs to be exercised and the shares financed by July next year. There is still time, and in any event, the transaction can be restructured if necessary." One analyst said that although some older deals could also be affected, the current market disruption could derail BEE schemes that were concluded towards the last stages of the recent market bull run. Formby said newer deals would suffer because the share prices were at their highest when the deals were struck. He said transactions where the debt was due for a refinance soon were at risk. In current market conditions, it might be difficult to refinance them. Kevin Kerr, the joint head of Investec Corporate Finance, said new BEE deals financed by third party banks would be harder to conclude because of higher long-term interest rates and banks' more conservative lending practices. "Additional equity layers and company facilitation will need to be introduced into new BEE deals compared with [deals in] the last few years." Rajay Ambekar, the portfolio manager at Cadiz African Harvest, said the financial market turmoil had affected BEE transactions that were in the pipeline. He said these were being reviewed. "At this stage it would be very difficult for companies to raise external funding for any BEE deal." Local markets had experienced a bumper season for the past 36 months before the global markets started wobbling under the subprime crisis in the US and Europe. |
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