Tongaat Hulett desperately needs to secure funding to continue paying creditors and keep its mills running or farmers and jobs in KwaZulu-Natal could take a catastrophic hit.
This week the 130-year-old JSE-listed group filed for voluntary business rescue for its South African operations after lenders pulled their financial support.
At the peak of the sugar season, the company employs more than 23,000 people, creates more than 185,000 employment opportunities and provides livelihoods for more than 21,000 farmers, many of whom are small-scale growers. The company directly employs 2,500 people.
Tongaat CEO Gavin Hudson said in an interview on Friday that the group needs to keep the mills running.
“If we are unable to crush the cane and generate sugar our business stops, there is no revenue, and without that obviously any business will crash to a halt. The most important thing is to try and keep our business running during this [business rescue] period. It’s really reliant on the business rescue practitioners working with the creditors to give them some level of comfort.”
Hudson said in an affidavit in support of the application for business rescue that lenders had indicated they were “in principle” agreeable to advance funding again after business rescue proceedings began, subject to certain conditions.
These included the retention of Piers Marsden as chief restructuring officer and of Trevor Murgatroyd, Peter van den Steen and Gerhard Albertyn of Metis Strategic Advisors as the business rescue practitioners.
Tongaat CFO Rob Aitken said the post-commencement financing will “at least give us the ability to pay suppliers to continue delivering even if we are not able to settle the outstanding amounts at present”.
Tongaat needs R1.5bn to repay its debts and fund its working capital requirements.
SA Canegrowers, whose members supply cane to Tongaat, said the company’s predicament has “catastrophic consequences for South African sugar cane growers and the entire sugar cane value chain.”
It said going into business rescue meant Tongaat had lost access to its bank accounts, which meant in turn that more than R400m that is due to be paid to growers tomorrow will likely not be transferred on time.
“This will have dire financial consequences for growers as well as the farm workers they support. This situation could plunge thousands of growers and workers into destitution and raises the risk of unrest in KwaZulu-Natal’s rural cane-growing communities,” the association said in a statement.
The payments due at the end of this month are for sugar cane delivered in September. For a number of small-scale growers, September marked their first deliveries of the season, and any default on these payments will have devastating impacts on their livelihoods, as well as the communities they support.
The decision to enter business rescue came without warning. As the other mills in the province lack the capacity to replace Tongaat’s output, the decision has serious implications for the supply of sugar to the local market, SA Canegrowers said.
Tongaat produces about 30% of South Africa’s brown sugar and refines 50% of all white sugar.
Hudson said the company could not afford to stop operating given the impact this would have on farmers, employees and the entire supply chain.
“If our refinery stops, South Africa will have a problem. We have many customers from drinks, confectioneries, bakers that rely on our commercial sugar and there literally isn’t the capacity elsewhere.”
Tongaat became mired in an accounting scandal in 2019 when allegations emerged that key former executives had manipulated accounts for years. At least six, including former CEO Peter Staude, ex-CFO Murray Munro and an external auditor, are facing charges for their alleged role in the fraud amounting to R3.5bn.
In his affidavit Hudson, who joined the company in 2019 to turn the business around, described the challenges that had increased pressure on liquidity.
In the last quarter of financial 2022, there was a shift in the sales mix towards low-margin bulk sugar sales to satisfy industrial demand, while cash-strapped consumers turned to “house brands” rather than the “miller brands”.
Production was lost as sugar cane could not be harvested during the flooding in April. This was exacerbated by higher transport costs due to damaged roads and railway lines. The floods also harmed the quality of cane, Hudson said.
In June the last credit insurer still providing cover for the company’s suppliers withdrew its support. This caused sudden and unexpected disruptions to the business.
The war in Ukraine resulted in significant cost increases for inputs such as coal, fertiliser and urea. Tongaat had absorbed most of these because of the commitment to inflation-linked sugar-price increases in terms of the sugar master plan, said Hudson.
The group was hard hit by the July 2021 riots, which resulted in damage to cane and mills and scuppered an important property deal.
Under Hudson and Aitken’s leadership the group has reduced debt by more than R6.6bn from R11.7bn through the sale of assets.
Hudson said it has been “a very, very tough journey.”
“One underestimates the amount of damage that was done to the business outside of the massive debt pile. There certainly was not much done … in terms of maintaining the assets [or] building the culture of the organisation.”
He said the business rescue decision was difficult to take given the effort that management had put in over the past 2½ years.
“We are seeing some green shoots of that effort. Our production this year is by far one of the best we have seen. Yields are good, everything points in the right direction, but the overall impact of Covid and the riots has [left] a big hole in our liquidity and that is really what we’re trying to solve for. So, from a board perspective, there is no alternative without additional funding,” said Hudson.
Afrifocus analyst Des Mayers said Tongaat had “very little option” but to go into business rescue. “I believe it has a good chance of surviving. A lot depends on what happens to the assets in Mozambique and Zimbabwe.”
Economic recovery in South Africa and in KwaZulu-Natal in particular “will be extremely important in respect of the very considerable property assets. The attitude of the banks will also be vital.”
Opportune Investments MD Chris Logan said the business rescue, which was a result of over-optimism about the company’s recovery prospects, would be a tough ask. The board needed to negotiate “a much better deal with the banks”, getting them to convert some of the debt into equity.
Tongaat was of national importance. “If it fails and people are not paid, it will make the previous civil unrest look mild,” Logan said.
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