Debt-ridden Tongaat may finally be in a position to raise capital

While Tongaat Hulett’s mountain of debt continues to loom large and options to sell assets have become increasingly limited, it may finally be in a position to raise capital, likely through a rights offer underwritten by a strategic equity partner.

This could allow it to finally shift the pendulum from its focus on putting out fires as it has lurched from one disaster to the next over the past 18 months.

Its March year-end losses showed that the extent of the challenges are not limited to debt and legacy issues, as they included a R369m hit from stock losses at its sugar refinery due to its inability to successfully ramp up production in reaction to increased demand. A combination of the sugar refinery loss, lower sugar production, limited property sales, finance costs (of R1.58bn), forex losses and hyperinflation in Zimbabwe all played a role in its headline loss of R1.1bn.

There were, equally, signs of real progress, with net borrowings reduced to R6.6bn from R11.4bn at end-March 2020. Gross debt was R7.2bn. Tongaat concluded refinancing of R6.56bn (only 75% of its R8.1bn target) and restructured Mozambique debt.

CFO Rob Aitken says that the initial value of Tongaat’s debt was far too large to do a rights offer. Then the share was suspended, and it dropped further after the suspension was lifted, giving little opportunity for this option. But there were several opportunities to dispose of assets at full value, which were taken, “and now at least there is a clear target on excess debt of circa R3.2bn, and we know where we need to get in terms reducing that”.

“There is a need for fresh equity to come in”, he says, adding that if Tongaat is unable to get support for a rights offer, there is a path forward with lenders and an asset disposal path, which at least provides some clarity. Tongaat is “pursuing multiple avenues” and is at “a bit of a decision point” now.

Decision point

CEO Gavin Hudson says that reducing debt and improving cash flow have been the focus and have taken up much of the time and effort of the leadership and people throughout the company. But they have also focused on streamlining operations and fixing up the results of poor management decisions, routines and behaviour.

“That has been [the past] year-and-a-half, literally, so absolutely the focus has been on paying down debt and restoring operations while cleaning out the closet, while not necessarily getting optimal streamlining or the forms of business you need,” he says. “To make an omelette you need to break a few eggs.”

Operations came with a legacy of not enough operational or capital expenditure, and over the past year ageing plant and equipment have been fixed.

“Now the task at hand is to put in the right people, the right processes, and refit for purpose the people in operations.”

Tongaat’s recovery plan has been hampered by events such as Covid-19. Since the year end, the losses due to unrest have been costly. While operations were not damaged, Tongaat lost 10 days of refinery and milling production at the peak of its season, and it took a further two-and-a-half weeks to get plants to settle and get production up again. The problem was compounded by much cane being burnt and vandalised. Processing that cane put massive pressure on mills, which lost momentum, Hudson says.

Property sales

When Tongaat took the refinery down for maintenance at the end of the season, it uncovered various issues, and took it slowly as it ramped up the refinery again.

The management is having to rethink property sales, many of which were delayed or cancelled, resulting in property revenue slumping 74% to R248m. Hudson says the portfolio is being repackaged into bite-size packages, which will make it easy to see what is in the portfolio and enable Tongaat to market it better and make it more appealing for a variety of investors. This has been presented to the executive committee and will be brought to the market in the next week.

Tongaat’s road to recovery  is “not going to be a vertical climb”, Hudson says, adding that this financial year will be challenging, already including the late start to milling season and the effect of the unrest. But chipping away at the debt “allows the organisation to breathe easier and myself and the leadership team to not look so aggressively at the balance sheet but focus on the business at hand and make it fit for purpose”. 

Hudson says many people don’t realise how substantial the Zimbabwe and Mozambique businesses are. Zimbabwe’s revenue is R6.1bn, just short of SA’s R6.2bn, and Mozambique’s R1.8bn. In the last year, Mozambican sugar operations delivered an exceptional performance, hitting a 10-year record local sugar sales, and debt is reducing. Zimbabwe delivered R320m in dividends, increased ethanol production 10% and secured milling licences, though sugar production and cane yields declined.

The SA business has been the provider of the debt for years and was not the best-run businesses, and has not had the opportunity to show what it can deliver.

“Many people haven’t been to look at  the size of the asset base we sit on,” Hudson says, adding that the management “hasn’t even started thinking of diversification apart from growing and milling sugar”.

Tongaat expects increased demand for sugar in all markets and an ongoing dividend from Zimbabwe, and for debt reduction to continue. It has warned of a challenging start to the crushing season, lower sugar inventory and slightly lower yields in Zimbabwe and Mozambique due to climate change.

Hudson says Tongaat’s recovery is not a one- or two-year journey and it has some unique challenges. It remains, as it has said, a fragile organisation with substantial debt, constrained cash flow and a legacy of poor operational and cultural practices, and with little room to absorb the shock of unforeseen events.

However, it is still standing after managing touch-and-go debt repayment issues and the effects of lockdown, unrest and recession. Whether this is enough to get support for a rights offer still has to be tested.