One of the sectors within which it is difficult to operate at the moment is the banking sector.
By Kumbirai Makwembere
The Ministry of Finance and the Reserve Bank of Zimbabwe (RBZ) are presently working on measures to regulate interest rates and bank charges, which will obviously impact negatively on banks’ profitability. Furthermore the new capital requirements, which many have viewed as steep and unrealistic, have not helped at all.
It is with this in mind that the market welcomed the proposal by NMB to bring on board a new shareholder through a private placement to inject US$14,8 million into the business.
In a notice to shareholders recently, NMB management indicated that the capital call was necessitated by the need to comply with the new minimum capital requirements set by the RBZ last year.
The capital raise will be undertaken in three phases: firstly, the company’s authorised share capital will be consolidated by a factor of 10 from 3 500 000 000 shares of US$0,000028 to 350 000 000 shares of US$0,00028. Thereafter, the issued share capital will be increased to 600 000 000 shares.
Lastly, 103 714 287 shares will be issued to an undisclosed foreign investor, bringing the issued share capital to 384 425 016. The shares will be issued to the new investor at a price of US$0,1430 which is a 91% premium to the latest trading price of US$0,0750.
The company has also included two buy-back features that will allow it to redeem the shares issued to the investor at the issue price plus a return of 10% compounded annually for the first five years and 5% for years six to nine.
Any shares bought from this buy-back will be cancelled. This therefore implies that the investor has a guaranteed return of 10% in the first five years, which could probably explain why the foreign investor is willing to pay a 91% premium. A return of 10% is very attractive to foreign investors owing to the low interest rates currently obtaining in overseas markets.
The buy-back, however, is subject to availability of reserves over and above the minimum required regulatory capital of US$100 million that will be in force unless the RBZ revises down the capital bases it set last year. In this regard, the option will be difficult to exercise unless the company gets another capital injection or becomes incredibly profitable.
The US$14,8 million injection will take the bank’s capital to US$42 million and it looks highly unlikely that NMB can comply with the US$100 million mark purely from profits without injection of more capital by shareholders, unless economic fundamentals change for the better.
The buy-back option could have been included to gradually manage down the foreign shareholding in the company. As it stands, approximately 66% of the company’s issued share capital will be in the hands of foreigners post the transaction.
Government approval of the deal will obviously depend on compliance with indigenisation laws. Perhaps a waiver was granted on condition that some of the shares will be bought back. If this is the case, it is encouraging to see the authorities softening their stance in a bid to enable firms to recapitalise.
Could this be a sign authorities are finally admitting that the country needs foreign investment if companies’ capital is to return to optimum levels?
The other buy-back feature is that of early redemption, allowing the investor to sell back the shares to the company at a premium of 20% in the event of a breach in the share subscription agreements. This buy-back option will obviously act as a performance measurement tool and to instil discipline on management so that they ensure capital raised will be put to proper use.
Several companies on our bourse have successfully raised capital, but failed to achieve the goals they had set on approaching shareholders. This clause will therefore make management accountable to shareholders, something that has been lacking in our market.
The main lesson that can be drawn from the proposed NMB transaction is that shareholders had to allow another investor to come on board to achieve the necessary funding.
Existing shareholders will be diluted by 27%. Since dollarisation, we have had companies that have failed to attract money for recapitalisation as majority shareholders insisted on retaining control. Some institutions are presently reeling from high debt which has resulted in high finance charges as they opted to go for the debt avenue instead of equity that is long-term and cheaper.
Simultaneously, the company also issued a notice advising shareholders that the company’s shares are now fully fungible to a limit of 40%. This implies that the shares can trade interchangeably between the Zimbabwe Stock Exchange and the London Stock Exchange where the company has a secondary listing.
However, this is only possible when the offshore price is higher and there is no buyer locally. We nonetheless believe that this move was made primarily to ensure that the shares are liquid and attractive to offshore investors.
On the whole, the fact that there are foreigners out there still willing to put money into local banking is good news for the sector. This deal seems to be fair to both the bank and the investor. Management should be given credit for crafting a deal that is beneficial to the company.
Effectively, NMB is issuing a convertible debt instrument that allows them to borrow five-year money at a cost of 10%, which is more in line with the credit lines issued by institutions as Afrexim and PTA. The foreign investor, on the other hand, stands to enjoy a determined return of 10%, though its coming at a high price.