Econet move to cut losses, redeems debentures

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Strive Masiyiwa, founder and chairman of Econet Wireless Global Ltd., speaks during the annual Milken Institute Global Conference in Beverly Hills , California, U.S., on Monday, May 2, 2016. The conference gathers attendees to explore solutions to today's most pressing challenges in financial markets, industry sectors, health, government and education. Photographer: Patrick T. Fallon/Bloomberg via Getty Images
  • The 2017 debenture helped avert potential default on foreign obligation
  • Holding debenture to maturity results in sustained losses
  • RBZ staggering of payments to aid company cashflow management

Econet Wireless is seeking an early redemption on debentures held by its members, in a move that is expected to reconfigure its balance sheet, improve cash flow management and spur profitability. The debenture is in respect to a 2017 capital raise which was expected to raise US$130 million through a rights offer on ordinary shares and linked debentures.

The capital raise, which was the largest of any company listed on the ZSE in history, was targeted at averting a potential default on substantial foreign obligations. The biggest chunk of the debt was due to China Development Bank, which was owed US$88 million. Other lenders included Ericson Credit AB, African Export and Import Bank and the Industrial Development Corporation.

These collective debts were falling due between April 2017 and Aug 2019 and had a weighted average interest rate of 7.1% per annum. The debenture proceeds from the capital raise made up 48.2% of the total US$130 million and allowed the company to defer its debt settlement highlighted above, by a further 4 to 5 years, given the feature of a 6-year maturity and redemption on maturity clause.

The underlying driver of the restructuring exercise of 2017, was not due to earnings under-performance, but the prevailing macroeconomic challenges characterized by foreign currency challenges. Beginning 2016, forex scarcity increased and the RBZ invoked an import priority scheme as a modicum for forex allocation. Most corporates such as Delta Beverages and BAT, faced challenges paying foreign creditors and remitting dividends to foreign investors.

Fast forward to 2021, with titling fundamentals, retention of the debenture up until maturity has the impact of weighing on Econet’s profitability. The company has reported significant foreign currency losses, in respect to the USD denominated debentures (78%) sitting on its books. Together with the interest due on the debentures, earnings performance since de-dollarisation has been underwhelming, given the weakness in the local currency.

Early redemption of the debenture will thus allow for cutting losses and elimination of exchange rate and credit risks with respect to the specific debenture in question. In the 6 months period to August 2020, the company suffered a -ZWL$10.3 million exchange loss, dragging the company to a successive net loss position.

Early redemption of the Debentures will give the Company an opportunity to strengthen its balance sheet by reducing the amount of its foreign currency exposure while giving the company more flexibility in terms of cash flow management

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