Magnus Heystek, Alec Hogg unpick “too good to be true” Ecsponent pref shares

Ecsponent is a company that is listed on the Johannesburg Stock Exchange, which helped to give it the veneer of credibility. Ecsponent's board also included an impressive line-up of business movers-and-shakers, not least of all Richard Connellan whose experience includes serving as the Executive Director of the Takeover Regulations Panel (TRP) and on the King III Committee on Corporate Governance. But Connellan has resigned, just as the muck hits the fan at Ecsponent, which promised good returns on the back of investments in small businesses. Top financial journalist and broadcaster Alec Hogg, founder of BizNews, and leading personal finance commentator and investment professional Magnus Heystek unpick the details of the latest developments at Ecsponent. – Jackie Cameron.Investors look set to lose millions as Ecsponent, a company listed on the Johannesburg Stock Exchange, runs into trouble..___STEADY_PAYWALL___.In this podcast with BizNews founder and editor-in-chief Alec Hogg, personal finance book author and Brenthurst Wealth Management founder Magnus Heystek sets out the background on Ecsponent, which is reneging on redeeming R188m of preference shares.."Go back, three, four, five years, this company started selling preference shares to the retail market, mainly in Pretoria, with very, very high interest rates.."If you look at the scheme it looks safe, but if you start scratching… we couldn't understand the business model. It attracted a lot of money, close to R2,5bn was pulled into this company on the basis of high and predictable dividends paid out via a preferential scheme operation. We looked at it for our clients and decided we don't want to touch it, because we don't understand the business model," says Heystek..The financials were getting worse and worse as the years went by, he points out. "Last year Ecsponent was making massive losses. We saw now what happened last week.".Hidden in the fine print was a "get out" hatch for the company.."Apparently there was a clause in the sales document that, in case of a default, they have the right to convert preference shares to ordinary shares. If that's going to happen, these shares will be worthless.".Hogg asks Heystek: "How does a company like this get a listing on the JSE?".Heystek responds by noting that "one worrying aspect of this listing it had some respected members of the business community on this board"..He underscores that board member Richard Connellan was the head of the Securities Regulatory Take over panel, "so he comes with a pedigree". ."There were other fairly acclaimed business people, but they have all suddenly resigned in the last month or so – which is also a bad sign. There was this implied good corporate governance, good people on the board.".So, Ecsponent had reputable people involved, got a JSE listing, was offering 12.5%, a substantial premium on what was on offer elsewhere, listeners are told..Heystek says he knows of one person who invested R20m in the scheme. "I said don't do it. He said 'but it's 12.5% interest and it's predictable'".."I said 'but you don't understand the business model'. That money for practical purposes is gone", he continues..Heystek says he spent some time a year or two ago looking at the corporate structure, and the company was transparent that it had a high risk business model.."They were upfront about it; they targeted smaller, medium size businesses ignored by the banking system. They were saying the banks don't want to touch these companies, but we feel enamoured enough that they will produce very good returns going forward through all kinds of things including short term lending, biotech and a variety of business areas.."That alone was a warning… This company was investing on a private equity basis in a range of companies. It just didn't sound right and it didn't taste right. We said there's simply so much risk.".The difference in interest rate between 12.5% and safe income funds, at 9-10%, was not enough to entice Brenthurst to look at it, he says..Hogg outlines a company warning that there is a reasonable certainty that in the six months to December the company will be in a loss-making position – "a significant understatement if you can't redeem your preference shares"..He asks: Is there any hope for this business?."One always hopes someone will come and rescue it. But looking at the business plan and the balance sheet and the loss, already in the year to June 30 2019, it was R213m loss, a substantial jump from the previous year. It all just went the wrong way," points out Heystek.."One presumes they will convert preference shares to equity shares, they will trade at 1c or 2c/share some will hold onto the shares, others will sell and walk away.".Does this mean the preference share holders have lost their money? ."Effectively, yes. They have the option to convert. They will have ordinary shares in a company whose listing is questionable at this point. Unfortunately I don't hold much hope for the investors who got involved in this.."You have the first tranche of pref shares that have to be repaid next month. Then literally every month a tranche has to be repaid. I don't see where the money is going to come from," says Heystek.Is there any hope for this business? "One always hopes someone will come rescue it," Heystek tells Hogg..From the Stock Exchange News Service: Updates from Ecsponent.Market update on strategy and solvency and liquidity of the Group, trading statement and cautionary announcement ECSPONENT LIMITED Incorporated in the Republic of South Africa Registration number: 1998/013215/06 JSE Code: ECS - ISIN: ZAE000179594 Debt Issuer Code: ECSP ("the Company" or "Ecsponent") MARKET UPDATE ON STRATEGY AND SOLVENCY AND LIQUIDITY OF THE GROUP, TRADING STATEMENT AND CAUTIONARY ANNOUNCEMENT Update on group structure and strategy The Ecsponent Board of Directors ("the Board") wish to advise its ordinary and preference shareholders ("Shareholders") and noteholders that the Company's strategic focus has shifted from a group which focussed on both private equity investments and financial services to that of almost exclusively a private equity investment business. The Company announced during 2019 the conversion of a material amount of its business-to-business interest-bearing loans into the underlying equity investments, most notably the substantial increase in the equity investment in MyBucks SA to obtain greater influence over the direction of the MyBucks SA Group. The current equity portfolio includes investments in the following major assets: • MyBucks SA; • InvestSolar Africa Limited; • Getbucks Microfinance Bank Zimbabwe Limited; • Ngwedi Investment Managers Proprietary Limited; • MHMK Capital Botswana Limited; • MHMK Capital Eswatini Limited; and • Chrome Valley Mining (Pvt) Limited. The portfolio holds significant underlying value which is estimated to require the next 3 to 5 years to fully materialise. MyBucks SA's past performance was particularly disappointing which necessitated shareholder intervention and culminated in a significant restructure of this group's operations during 2019. The Board is currently investigating the conversion of further loans in its business-to-business loan book into equity investments. As at the date of this announcement, the remaining loan book, after taking into account conversions into equity and impairments, will approximate R61 million. Update on capital structure and ability to settle obligations As a result of the change in the business model into that of a private equity investment, the Company no longer considers the issue of its current classes of preference shares or notes an appropriate form of funding. The Company will accordingly be considering alternative forms of funding going forward. The Board is currently assessing various options pursuant to a capital restructure of its preferences shares and/or alternative forms of funding, specifically also taking into account the potential conversion of preference shares into ordinary shares in the event of default in accordance with the terms of the preference shares. The Board is also considering the disposal of certain non-core assets in order to deleverage the Group's balance sheet. A further announcement will be made in this regard as soon as the Board has assessed and concluded on the various alternatives. The Board advises shareholders that, having assessed its immediate and future obligations and the funding currently available to the Company, it expects that the Company will not be in a position to settle its obligations as they become due, in particular in relation to the redemption of the preference share obligations due in March 2020 and its ongoing dividend payment obligations on its various classes of preference shares. Accordingly, the Board expects a default event to occur on its March redemption obligation and ongoing dividend obligations. The following redemption amounts are due for payment in March: • Class A, Series 2 in an amount of R24 694 600; • Class B, Series 2 in an amount of R46 166 000; and • Class C, Series 2 in an amount of R117 517 000. The above follows after various funding alternatives which the Board had considered for the refinancing of its preference share debt have been exhausted and given the Company's current asset base, which is aimed towards long-term capital growth and not capable of conversion into cash in a short space of time. Trading statement In terms of paragraph 3.4(b) of the JSE Limited Listings Requirements, companies are required to publish a trading statement as soon as they are satisfied, with a reasonable degree of certainty, that the financial results for the period to be reported upon next will differ by at least 20% from those of the previous corresponding reporting period. The Board therefore wishes to advise shareholders that it is reasonably certain that the interim results for the period 31 December 2019 will indicate a loss-making position, in comparison to the published results for the interim period ended 31 December 2018 which indicated a profit-making position. A further trading statement will be made once the Board has a reasonable degree of certainty as to the expected range of the Group's results for the interim period ended 31 December 2019. The financial information on which this trading statement is based has not been reviewed or reported on by the Company's external auditors. The Company's financial results for the interim period ended 31 December 2019 will be released on or before 30 March 2020. Cautionary announcement Shareholders are advised that the outcome of the capital restructuring initiatives may have a material effect on the price of the Company's securities and accordingly should exercise caution in dealing in the Company's securities until a further announcement is made. For more information about this announcement or the Ecsponent group, email investor.relations@ecsponent.com or visit www.ecsponentlimited.com/investor-relations 10 February 2020 Pretoria Sponsor to Ecsponent Questco Corporate Advisory (Pty) Ltd Date: 11-02-2020 08:15:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS. .Changes to the Board ECSPONENT LIMITED Incorporated in the Republic of South Africa Registration number: 1998/013215/06 JSE Code: ECS - ISIN: ZAE000179594 Debt Issuer Code: ECSD ("the Company" or "Ecsponent") CHANGES TO THE BOARD Shareholders are advised that, Mr Shaka Sisulu, an independent non-executive director has resigned from the board of the Company with effect from 10 February 2020. Furthermore, Mr Richard Connellan, who has served as non-executive and chairman of the board of directors for 9 years, has accepted an executive position with the Takeover Regulation Panel and has tendered his resignation from the board of the Company with effect from 28 February 2020. The board of directors extends its appreciation to them for their services to the Company and wishes them well in their future endeavours. .Market Update on Capital Restructure ECSPONENT LIMITED Incorporated in the Republic of South Africa Registration number: 1998/013215/06 JSE Code: ECS - ISIN: ZAE000179594 Debt Issuer Code: ECSP ("the Company" or "Ecsponent") MARKET UPDATE ON CAPITAL RESTRUCTURE Further to the announcement released on the Stock Exchange News Services ("SENS") dated 10 February 2020, wherein security holders were advised that the Company is assessing various options pursuant to a capital restructure of its preferences shares and/or alternative forms of funding, the Board wishes to further advise its security holders that the Board is investigating a proposal whereby the returns and capital redemption profiles of its securities are more aligned to the returns expected to be generated from the current asset base of the Company and its investments, through either: - an amendment to the terms and conditions of the current classes of preference shares in issue, ("Terms Amendment"); or, alternatively - a conditional general offer to its current preference shareholders for an exchange of their preference shares currently held, for a proposed new class of preference shares. The Terms Amendment, if progressed, will require the approval by way of an extraordinary resolution of preference shareholders holding 66.67% of the value of each of the relevant classes of preference shares being amended. In addition, an approval for the amendment of the Company's memorandum of incorporation, by way of a special resolution of the ordinary shareholders and each class of preference shares, will be required. Given that the Company is still exploring the various options, security holders are advised that nothing contained in this announcement should be construed as a firm intention by the Company to make a general offer. For more information about this announcement or the Ecsponent group, email investor.relations@ecsponent.com or visit www.ecsponentlimited.com/investor-relations 11 February 2020 Pretoria Sponsor to Ecsponent Questco Corporate Advisory (Pty) Ltd Date: 11-02-2020 04:09:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

Magnus Heystek, Alec Hogg unpick “too good to be true” Ecsponent pref shares

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