MTN Zakhele’s Credit Crunch and why we should expect more of the same

MTN’s empowerment vehicle, MTN Zakhele Futhi is on the brink of collapse. MTN Zakhele was set up in 2016 to allow qualifying black investors to gain geared exposure to the MTN share price. MTN has decided to suspend its interim dividend.

MTN Zakhele relied on dividends to cover its funding cost. The absence of the interim dividend combined with the MTN share price being 45% of what it was on issue means that MTN Zakhele is now underwater.

MTN Zakhele unfortunately represents a trend that we’re going to see more and more of. Where traditional funded BEE structures are combined with economic contraction due to COVID. There are many implications, primary among which is what it means for the black shareholders who invested R20.00 per share times 123 million shares. MTN Zakhele took more than two and a half billion Rand away from black investors.

It’s not good enough to say, “Buyer beware. Shares go up as well as down.” The nature of traditional funded BEE structures is that they exaggerate the black holding by lending the black shareholders money to buy additional shares. If these were ordinary shareholders, they would not have lost all of their money.

It would be interesting to know how much MTN made out of its notional debt and how much the banks made out of their preference shares. In other words, how much value was misattributed from black shareholders to savvy financial engineers.

In many preference share based structures, missing a debt payment or negative real value are among the triggers for immediate and full repayment. On this basis, we should anticipate several of these structures to follow MTN Zakhele into liquidation.

Traditional funded structures work when business is booming but in times of contraction, they set the commercial interests of the company against the interests of the black shareholders.

The scorecard was amended in 2013 and rather than trying to solve this opposition, the scorecard attempted to give companies an interest in transferring real value to their black shareholders.

This was done by setting a target, as a percentage of the value of the company, that should be in black hands. This target measures the amount by which the equity held by black people exceeds the amount they borrowed to buy the shares.

In other words, it looks at the equity in black hands if the debt were to be settled. If the debt was worth 80 and the equity value 100, a 20% fall in the equity value would reduce the value of ordinary shareholders by 20%. It would reduce the value of the black shareholders to zero.

Failing to meet the minimum requirement for the percentage of real value in black hands (called Deemed Value) results in a company being discounted an empowerment level.

The erosion of real value caused by a share price falling by 55% is part of what happened to MTN Zakhele’s shareholders. It is easy to see how many other traditional BEE schemes might follow suit.

Many companies drop an empowerment level because of the erosion of Deemed Value. Some companies will no longer qualify for licences critical to their businesses. Some will have signed contracts with covenants committing them to achieving or maintaining a particular empowerment level. All of these might bring about catastrophic regulatory, client relationship and commercial consequences.

Here’s the rub:

This need not be a slow-motion car crash where companies watch as their access to market and contracts fail.

Ownership solutions are available that are not vulnerable to share price volatility.

Other sources of empowerment points to compensate for those lost to Ownership are there if you know how to look for them.

Maintaining or improving your empowerment score in an environment where your competitors’ scores are falling provides a bigger advantage than ever before.

Turning empowerment into a competitive advantage is what Quiver Tree Capital does.

I urge you to act now, while there is still time to make a difference. Do not wait until your verification moment, when it will be too late. Call Quiver Tree for intelligent assistance on your B-BBEE strategy.