There’s nothing quite like a sustained bear market to make the idea of using shares to guarantee a loan to buy the same shares seem like a poorly conceived idea. For years as share prices moved inexorably upwards it looked like a winning tactic for both the lender and the borrower.
It must have looked like money for old rope for investors with a high tolerance for risk, a category that included Christo Wiese and many of his associates. For years it worked very well, until it didn’t.
In 2017 Wiese and his banks took a multibillion-rand knock when a margin call on some of his Steinhoff shares forced him to offload them at a huge loss to repay the banks. Earlier in June, Steinhoff Africa Retail, soon to be renamed Pepkor, revealed a R500m gap in a loan facility provided to its executives in 2011. The loan was to cover the purchase of Pepkor shares and the deal must have looked like a no-brainer for much of the first six or seven years. At one stage the executives were showing a fivefold return on borrowings. And then it all collapsed.
The latest casualty is Invicta CEO Arnold Goldstone, who was forced to sell R4.9m of Invicta shares in the first week of June. The transaction was described as "an involuntary sale of shares by funders under security arrangements". The Wiese family owns 48% of the company. Goldstone confirmed the sale was to fund a margin call on a loan for which Invicta stock had been pledged as collateral. A few days later Invicta announced Goldstone had sold another R7m worth. Again the transaction was described as an "involuntary sale of shares by funders under security arrangements". Tough trading conditions and the Wiese connection has seen the share weaken since February.
PPC’s results statement for the year ended March offers yet another reminder that there is no sign of the state’s infrastructure drive materialising any time soon.
The cement producer said economic growth in its home market is likely to be anaemic over the next year, and the outlook for its materials division is "muted as it is linked to infrastructure investment growth".
The lime division is mainly exposed to the steel industry, and the readymix and aggregates business relies on construction projects. Neither units are expecting fireworks.
Also on Monday, Raubex said its interim earnings would fall at least 20% because of "continued weak conditions in the South African construction industry, particularly in the road construction sector".
PPC and Raubex’s comments follow the grim news from Basil Read on Friday that it’s been forced to file for business rescue. Eyal Shevel, head of corporate ratings for Africa at Global Credit Ratings, said on Friday lender support for construction firms is "very weak" as no one knows where work will come from. Group Five secured lender support in May, though it had to use its healthy European concessions business as security.
Shevel thinks consolidation within the construction industry is probably necessary to keep the small and mid-sized players alive. He says it is likely that "one or two" of these companies will have to exit the market before competition for projects normalises.
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