RioZim successfully completed a debt restructuring exercise early this year in which Zimbabwe Asset Management Corporation (Private) Limited ‘ZAMCO’, a division of the RBZ became its new creditor under new and improved terms.
Obligations that were hitherto short- term, overdue for payment and attracting interest payments of 21 percent per annum are now payable over a period of five years while attracting only nine percent. In one swoop, RioZim was granted the brand new lease of life with the company now looking to the future with a transformed poise of one full of hope and anticipation.
Credit ought to be attributed where it is due. For all its shortcomings, the government of Zimbabwe is spot on with this exercise and has to be applauded accordingly. ZAMCO is arguably one entity that we will look back to and realize it had much better and profound positive socio-economic impact than empowerment and agrarian reform policies that often take the centre stage. The policy has successfully aligned aspirations of the common folk who form the labour force, the entrepreneur, government and even the loan sharks that masquerade as bankers. This is a sweet spot that none of the other two is anywhere closer to finding.
At the time of structuring this transaction, RioZim had paid a cumulative jaw dropping $52 million in interest charges and fees towards its crippling debt that stood at $59 million as of December 2011. This is just $7 million shy of the total obligation outstanding at the time that GEM assumed control. For all this efforts however, the company only managed to reduce thestock of debt by $16 million to $43 million. The bloody thirsty banks took the rest. The same banks that were eager to tear apart the company and sell its assets piece meal emerged the biggest beneficiaries.
Banks drew the most cash from the company while maintaining an iron grip on its throat standing ready to collect every cent from the business for the foreseeable future. At the rate $16 million capital repayment every 5 years, it would take the company 13 years to properly appease its bankers without remitting a cent to shareholders. One would be forgiven for feeling sorry for GEM. Their reward for saving RioZim from its certain demise has been to stand behind the queue and wait for vultures to eat their full before they could enjoy the fruits of their enterprise.
Granted they are supposed to be the wiser. After all they have Ivy League bankers in their ranks. The have the sophistication and should have known better. They did not get into this with eyes wide-wide shut and they are supposed to deserve what’s coming to them. But alas, Zimbabwe affords no one the opportunity to say ‘I told you so’. Ours is a brutal environment littered with broken families at the hands of usurious interest rates. Many have lost their homes to loan sharks who concoct loan conditions that set you up for default from day one. The practice is indeed repulsive. Society rightly frowns at it and its peddlers, yet the narrative is lost when we look at corporate borrowers. Just like any other legal persona, companies do suffer and can have their lives ruined by debt. Their position is however made more tenuous by the fact that when they fail, they go down with the livelihoods of so many.
RioZim’s story pleases mostly because it has achieved many things that market forces have clearly demonstrated inability to balance within the Zimbabwean context. The most important for me is whipping banks into line. Why banks insist on sticking to an interest charging regime that stifles and kills their client is beyond me. This problem is worsened by the fact that most companies are multi banked with lines of credit from a cocktail of bankers some of whom make advances with no proper credit analysis. In the event of default or deterioration of credit quality of the borrower, banks fight to outdo each other in slapping punitive interest rates to the already frail company in the process bringing it swiftly to its knees.
With a deal like the one for RioZim, ZAMCO plays the go between, forcing banks to be realistic with their claims and receive liquidity which they are short of anyway. On the other hand, ZAMCO reconfigures the client’s debt to terms that ensures survival and ability to service debt. The company thus pays for its sins in full, while the bank has to take a haircut on exorbitant claims and receive a liquid asset in return. Most importantly, jobs are saved. Bankers do even better because their clients are formally employed and qualify for their elitist type product offering. Such a solution which is clearly what our situation demand is otherwise unachievable without the intervention of an authoritative part, the RBZ in this instance.
The impact to the economy is profound. RioZim’s case can still demonstrate how important this intervention can be to an economy. With the collapse in commodity prices whose driver many are still to decide whether it be the super cycle or technological advances could not have come at the worst time possible. The company which was hardly breathing was destined for certain collapse as revenue generation could not sustain its loan repayment under the conditions imposed by its bankers. The fact that low commodity prices appeared destined to stay for longer meant that the option to collapse the whole thing with shareholders only losing to the extent of capital already outlaid was right in the money. Liquidating the company was probably the only economic option left. This was thwarted simply because payment terms were varied with the company making good its obligations anyway but only over a long period of time.
The second positive is the strategic decisions that RioZim now has to make in light of its changes circumstances. High interest rates and poor liquidity meant that any project that the company intended to pursue needed to produce super profits if it had to pass key huddles that would make it economic. Which improvements on both fronts (leverage and liquidity), RioZim invariably has more projects that have become viable and can also be executed sooner. What easily comes to mind is the company’s coal assets that require investments in power stations as well as the mooted project to transform ENR to be able to process platinum group metals (PGMs). The company’s investment in Murowa Diamonds may also have been encouraged by positive developments as regards management of its debt and liquidity challenges.
Further to that, with commodity prices determined to stay lower for longer, RioZim probably has one option to ensure it meets its obligations under the new terms and deliver a return to its shareholders. The company has to invest and lower its cost of production. This can be achieved by a combination of two things being bringing up to date its plant and equipment as well as ramping up production volumes to lower cost of production. The latter strategy is currently highly appealing in an industry where assets a cheaper due to widespread distress. It will thus not be surprising if we will see RioZim announcing huge capital expenditures to bring more efficient equipment or go on an acquisition rampage to increase its volumes. It is in the best interest of the company to invest in Zimbabwe with all the noise being made about capital shunning the country simply because a policy framework has created an environment that allows it.
ZAMCO has thus once more resurrected RioZim, but this time with desire and ability to expand and create jobs, generate more forex earnings, contribute to treasury and above all provide a decent return to its shareholders. By Farai Murambiwa/The Source
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