Synthetic fuels and chemicals group Sasol said on Monday that earnings for the six months to end-December could fall by at least a fifth, with the company signing new debt agreements as it grapples with cost overruns at its Lake Charles Chemicals Project in the US.
Sasol said on Monday it expects headline earnings per share to fall at least 20% for the second half of 2019, from the prior period’s R23.25.
The company has also secured a new $1bn (about R14.7bn) debt facility with lenders, who have agreed to raise the threshold of the debt covenants.
The lenders had agreed to raise the covenant on the debt to 3.5 times net debt to earnings before interest, depreciation, taxation and amortisation (ebitda) for Sasol’s results to end-June 2020, Sasol said. After this, a three times net debt to ebitda covenant will apply.
The company has a $1bn syndicated loan facility with a number of banks for 18 months, and two bilateral facilities with a quantum of $250m, with a tenure of two years.
The Lake Charles project was meant to transform Sasol from a largely SA-based synfuels company into a global chemicals giant, but investors have grown disillusioned as the project costs ballooned from $8.9bn to $12.9bn since 2014.
Abdul Davids, of Kagiso Asset Management, said the drop in earnings is mainly due to expected start-up losses from the Lake Charles project, weak chemical prices and substantial interest cost expenses.
“We were aware that the new management team was negotiating a relaxation in the debt covenants, so this news is positive. We suspect that the 3.5-times covenant will come at a cost but will substantially reduce the probability of a rights issue or capital raise by the company,” he said.
Sasol said the facilities would enhance the company’s dollar liquidity position during the peak gearing phase as Lake Charles ramps up but should not affect Sasol’s net debt position.
The Lake Charles cost overruns ultimately cost joint CEOs Stephen Cornell and Bongani Nqwababa their jobs, though an independent probe cleared them of any wrongdoing. The investigation found that a “culture of fear” within the project’s management team at Lake Charles had prevented problems from being properly reported.
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