Corporate greed could have caused NMB Bank to conceal that Hamish and Simon Rudland were the sub-underwriters in the Zimre Holdings Ltd (Zimre) US$15 million rights offer early this year as it emerged that the financial institution was keen on pocketing millions in transaction fees for its controversial role in the capital raise, information obtained by businessdigest this week shows.
NMB has refused to comment on the transaction, citing bank/client confidentiality.
This comes as it emerged the bank withheld key information that Day River Corporation (DRC), a consortium which emerged with a 40% Zimre stake, was the sub-underwriter and eventual beneficiary in the event shareholders did not follow their rights in a US$15 million rights offer held early this year.
“NMB Bank as underwriters had been convinced by (Zimre) management that there lies value in the business. The fact that they agreed to underwrite also signals that there is something of worth they see in ZHL prompting them to take the risk.
Management signals that NMB was more driven by the need to earn an underwriting fee, than long-term reasons.
The view by ZHL management was that the move was speculative and NMB was bound to dispose the equity in about a year,” documents seen by businessdigest show.
“The bankers for DRC were also NMB Bank, thus narration of the reference supposes that the NMB Bank and ZHL were aware of the source of funds and did not disclose full details to shareholders. In our view this could have had a material impact to the decision taken by shareholders with respect to the rights issue.”
Nssa feels that full disclosure was not made by parties in the transaction.
For its role in assisting the covert takeover of Zimre as an underwriter, NMB bank was set to get US$900 000, according to documents seen by businessdigest this week.
Although an underwriter’s agreement is a public document, it is now a closely-guarded secret as the bank attempts to put a lid on the controversial deal.
While the bank had agreed to underwrite the rights issue and disclosed to Zimre management that they would hold shares for a period of one year, the financial institution sold its 40% stake two months after the close of the rights issue, clearly indicating a profiteering and speculative motive.
Documents show that while NMB took up the balance of shares as the underwriter, the rights issue account statement reflects that on February 27 2015, a credit of US$12 295 386,28 referenced exDAYRIVER was made into the account.
DRC is the company that eventually took over the shares from NMB on May 11 2015.
According to the rights issue circular, the rights offer closed on February 20, which was also the last day for payment.
Investigations show that the payment for the shares could have been made out of time. But timelines could have changed since the first circular.
Suggestions are that Zimre management may have known on the day of receipt that there was someone behind NMB Bank who had funded the purchase of the outstanding shares.
Post the rights issue, Nssa requested for an update from Zimre management on the identity of the underwriter who was represented by NMB Bank, background of the underwriter and his/her strategic intent for ZHL, how much was raised by the rights issue, evidence of the rights issue proceeds credited into ZHL’s account and the subsequent application.
“The breakdown of how much was raised must highlight what was raised by shareholders versus the underwriter,” Nssa ordered Zimre management.
Nssa wanted to know the Global Credit Rating (GCR) rating of Zimre in light of the presentation made to Nssa and government at the time management sought support for the capital raise and an update on the disposal of equity in Nigerian company.
In a letter to former Nssa general manager James Matiza dated October 2, Zimre chief finance officer Timothy Nyika said NMB Bank had taken up the balance of shares valued at US$12,295 million as the underwriter. The letter was copied to outgoing CE Albert Nduna and chief operating officer Solomon Tembo.
“ZHL, in view of the precarious position of its Reinsurance subsidiary, Baobab Re which was facing serious liquidity challenges, loss of market share, GCR rating downgrade and persistent underwriting losses, got an approval from its board to understake recapitalisation of the group by way of rights issues. In 2014, the GCR rating was downgraded from A- to BB+ and this resulted in serious loss of confidence and drop in market share from 15% in 2014 to 8% in 2014,” Nyika said.
“NMB never indicated of any sub-underwriters and as a management, we were not aware of the investors that NMB was discussing with. NMB indicated to us and to the ZSE as part of the ZSE regulations that it had enough capacity and resources to support this rights issue.”
He said on May 11, DRC was registered as the new investor in Zimre, adding NMB has not explained the shareholder changes to the group. Nssa feels that adequate disclosures were not made by parties in the transaction leading to the presumption that the reasoning was aimed at pacifying support of shareholders.
Although the company raised US$15 million on the pretext it wanted to improve the credit rating of Baobab Reinsurance, its subsidiary, Zimre is said to be spending on shares on the ZSE. The company is linked to share acquisitions in CFI and Nicoz.
According to investigations, the latest spending spree is parallel to a meeting held in December last year at the Finance ministry offices at New Government Complex attended by Nssa and ZHL management and board members and officials from the ministry.
According to minutes of the meeting, ZHL management claimed the US$15 million would go towards local operations (US$8,6 million), (US$3 million) would go into regional reinsurance operations (US$3 million) with the Mozambican, Zambian and Botswana operations getting a million apiece.
Management also claimed that group restructuring and right sizing would cost US$2,5 million and transaction costs US$0,9 million.
ZHL management told the meeting its business ratings by GCR were reviewed downwards in 2012 from A- to BB- on the back of a deteriorating balance sheet, adding the rating had negatively affected the market’s confidence leading to a loss of business that triggered reduced premiums.
Management also claimed that the balance sheet structure was illiquid, a scenario which rendered the business incapacitated to pay out significant claims in addition to limiting the writing capacity of the Re–insurance business.
Management advised these issues were cited in the Insurance and Pension Commission reports; resulting in dampening of market confidence.
According to information obtained by businessdigest, management claimed sanctions had limited the amount of reinsurance business they can underwrite.
“The resultant Premium source distribution is now 80%:20%, local relative to foreign. Prior to OFAC market share was stable at circa 29%, however, it had shrunk to about 10%. This exacerbated by the impact of the deteriorating risk ratings,” one document says.
At the meeting, shareholders raised concerns over the significance of the dilution, the amount of money Zimre sought to raise, the time frames of the rights issue and the timing.
“It was proposed in the meeting for ZHL to consider disposing their equity in listed investments to concentrate on reinsurance as core activity. Management was not keen on the option as they had reservations with potential loss of synergies and the impact it would have on the ZHL balance sheet,” the document says.
After the Finance ministry team said government would not be able to participate due to financial constraints, Nssa considered multiple scenarios against the authority’s cash flow position over the timeframe of the rights issue.
The amount required for each scenario is highlighted in the graph.
Scenario 5 was viewed to be the best option as it allowed for Nssa to commit financial resources without compromising on commitments that were made at the time for Zimre to be capitalised, minimise the impact of portfolio losses given the premium pricing the rights issue was being conducted at, avoid importing losses on the Nssa balance sheet as the investment would elevate to associate status and Nssa and government to have sufficient say on the affairs of the ZHL through Board representation.
This position was then communicated to the deputy director, Financial and Capital Markets and Economic Development in the Finance ministry on January 12 2015.
The Extraordinary General Meeting was held on January 28 2015. The rights offer opened on February 2 and closed on February 20 2015.
“In the event that this transaction is not implemented, the Directors are of the opinion that the company’s growth going forward will be severely compromised resulting in continued sub-optimal financial performance,” said Zimre in its circular.