Things turned sour for shareholders of Tongaat Hulett, after the company announced it was entering business rescue, due to the high levels of debt in the country.
The uncertainty of the future of the company has sent shock waves through the business fraternity in South Africa.
Tongaat is a major regional sugar producer with operations in Zimbabwe, Botswana, Mozambique and South Africa. With more than 26 000 employees, it also provides a livelihood to more than 20 000 cane growers.
The company said in a statement on Thursday that its company’s debt levels at R6.6 billion remained well in excess of what could be serviced and that delays experienced in the recapitalisation had worsened the situation.
“The South African lender group has informed the company that in all of the circumstances of the restructuring plan, they are unable to support the restructuring plan or to provide the additional funding required. Consequently, the repayment date of the borrowing base facility will not be extended,” said Tongaat.
Until this point the South African lender group had remained supportive of the company and had worked constructively with management over the past three-and a-half years to assist the company in addressing its liquidity constraints. To assist towards a R1.5bn working capital shortfall, the lenders advanced a new short-term borrowing base facility of R600 million on July 29, 2022, which was now due for repayment.
After Tongaat was implicated in an accounting scandal in 2019, the firm was put under new management with a turnaround plan. It was banking its future on a recently approved recapitalisation plan after its R4bn right issue with the controversial Rudland family, through Magister Investments, went south.
“The extent of the challenges faced by the company and its current strained financial position are well publicised and arose from years of high and increasing debt levels, alleged financial misstatements and historic mismanagement under previous leadership. These factors have resulted in the loss of significant value for shareholders,” the firm said.
Without the required additional funding, and an extension of the repayment date of the borrowing base facility, and having taken extensive legal advice, the board said it had determined that Tongaat was facing circumstances constituting “financial distress“ and decided to enter business rescue.
Possible impact on consumers
Chris Logan, a shareholder activist and Opportune Investments owner, said Tongaat Hulett’s South African sugar operations had been uneconomically viable for more than a decade, but the fraud at Tongaat had hidden this.“
“The good news is there is apparently a sugar shortage, there is less dumping, and you need Tongaat,” Logan said.
“The problem with SA sugar is its old mills. KwaZulu-Natal is not the greatest area for sugar cane and has to rely on rain and also needs capex investment. This leads to sugar yields being below average,“ he said.
Tongaat said its South African turnaround efforts had been hampered more recently by the Covid-19 pandemic and the riots and floods in KwaZulu-Natal. Operational headwinds were encountered in the form of sugar loss at the refinery and poor milling performance, which revealed inadequate historic plant maintenance.
In addition, at the end of the 2022 financial year, the working capital requirements of the South African sugar operation increased significantly with slower-than-expected sugar sales and a normalisation of inventory levels post the refinery loss, Tongaat said.
With Tongaat now in business rescue, the future of the sugar sector in the country is not clear.
Meanwhile, more than R400 million in payments to Kwazulu-Natal cane growers is at risk as Tongaat Hulett, the mainstay of the province's economy goes belly up.
The South African Cane Growers Association said on Friday that it was deeply concerned about Tongaat going into business rescue, which could have catastrophic consequences for South African sugar cane growers and the entire sugar cane value chain.
“This move means that Tongaat Hulett has lost access to its bank accounts, which in the immediate term means that over R401 million that was due to be paid to growers at the end of October 2022 will likely not be transferred on time,” said Andrew Russell, SA Cane Growers chairperson.
Russell said the unbundling of Tongaat would have dire financial consequences for growers as well as the farm workers they supported.
This situation could plunge thousands of growers and workers into destitution and raised the risk of unrest in KwaZulu-Natal’s rural cane-growing communities, he said.
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