Four months after Tongaat Hulett’s luckless capital-raising deal with Magister Investments, the agri-business has been forced to enter business rescue. But only in South Africa: the beleaguered company, which operates in the sugar, ethanol, animal feeds, cattle and property sectors, has a significant footprint throughout southern Africa. As such, operations in Botswana, Mozambique and Zimbabwe will be unaffected by the SA business rescue process, it explained to shareholders on Thursday.

In the Sens report, Tongaat Hulett said its debt levels were “well in excess” of what it can service. It blamed delays in its recapitalisation effort for worsening its position, adding a debt restructuring plan to address the excess debt and a R1.5-billion shortfall in working capital facilities was approved by the board of directors and submitted for consideration to interested parties. 

Tongaat’s messy finances, which have been widely reported on, were caused by a deepening debt hole dug by executives who are accused of creaming heavily off the top. In its Sens announcement it refers modestly to this corporate malfeasance as “alleged financial misstatements and historic mismanagement under previous leadership”. 

On 23 September 2019, Tongaat announced a major turnaround, in response to a damning PwC forensic investigation which revealed the company’s 2018 profits had been overstated by 239% and its assets by 34%.

Read in Daily Maverick: “Who is really behind the R2-billion Tongaat Hulett bid?” 

It replaced its chairman, Bahle Sibisi, with Louis von Zeuner, who is highly regarded in corporate circles, and removed four other long-time board members, under whose watch the accounting irregularities took place.

At the time, shareholder activist Chris Logan welcomed the move, saying Tongaat was “cleaning out its old board” following a turbulent year, in which trade was suspended on the JSE after its share price plummeted when the company announced in May and June that it would have to restate its financial results.

Seven people, including six former Tongaat executives, appeared in the Durban Specialised Commercial Crimes Court on 10 February 2022 on fraud and racketeering charges associated with the sale of the sugar producer’s land between 2015 and 2018. 

The suspects – alleged to have backdated the sale agreements, which had a significant impact on the company’s financial results – include former CEO Peter Staude, CFO Murray Munro, managing director of Tongaat Hulett Developments Michael Deighton and ex-Tongaat Hulett Developments planning directors Rory Wilkinson, Kamasagrie Singh and Samantha Shukia.  Gavin Kruger, the Deloitte audit partner on the Tongaat Hulett account, is the seventh accused. They were all granted bail. 

Based on these fraudulent sales, Tongaat’s greedy executives allegedly notched up performance bonuses worth millions of rands.

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Their circumstances have become progressively less cushy. In July, their matter was transferred to the Durban High Court, where they face 26 charges of contravention of the Financial Markets Act, the Companies Act and Prevention of Organised Crime Act (Poca). 

But it seemed the beleaguered sugar producer couldn’t catch a break. On 19 May 2022, it suffered another setback, with Von Zeuner stepping down for personal reasons. He was to remain on the board until 30 June 2022. 

David Noko, who had served as lead non-executive director on the Tongaat board since 1 July 2020, was then appointed interim chair to stem the decline, assisted by leading business turnaround practitioner Piers Marsden as the chief restructuring officer.

Hampered turnaround efforts

In Thursday’s Sens announcement, Tongaat said under a new leadership team and board, the company’s comprehensive turnaround strategy sought to introduce a process to address these challenges. Good progress had been made on a variety of fronts, including realising cost savings and improving liquidity management. Debt had been reduced by more than R6.6-billion (from R11.7-billion) through the sale of assets. 

“Despite the good progress on debt-reduction initiatives, however, Tongaat Hulett remains unable to service its residual debt, the majority of which [87%] is carried by the cash flows of the South African sugar operation, the property business and dividends and operational support fees received from the non-South African sugar operations,” Tongaat Hulett said.

Read in Daily Maverick: “Probe may torpedo Rudland-Tongaat takeover after finding regulator was fed ‘incorrect or incomplete’ information”

It noted recent monetary policy changes in Zimbabwe as having dented sugar prices and cash flows, limiting the availability of surplus cash for dividend distribution, while the repatriation of funds from Mozambique is prohibited by the in-country debt agreements. 

The South African operation had trouble on all sides, with the turnaround efforts hampered by the pandemic, the riots and floods in KwaZulu-Natal, and sugar losses at the refinery and poor milling performance, due to inadequate historic plant maintenance. At the end of the 2022 financial year, the working capital requirements of the local sugar operation had increased significantly, with slower-than-expected sugar sales and a normalisation of inventory levels after the refinery loss. 

These factors have added significant pressure on the company’s liquidity and contributed to a shortfall in its working capital facilities required for the 2023 financial year. It’s a worsening financial condition, with interest piling up on the excess debt balances.

“This position has been exacerbated by delays experienced in the recapitalisation of the company, particularly the planned equity capital raise [rights issue] which failed in June 2022, due to regulatory and other requirements.”

On 14 October 2022, Tongaat’s board approved Marsden’s debt restructuring plan, which entailed disposing of the non-South African sugar operations; securing a sponsor to support the capital reinvestment required by the South African sugar operation; introducing a five-year debt instrument repayable through the disposal of some company land; progress in the legal claims arising from the alleged financial misstatements; and aligning its corporate office with a smaller operating footprint. 

But, it said while interest had been expressed by existing shareholders and potential new equity investors to support the recapitalisation, adequate bridge funding was not materialising.

Tongaat has a R1.5-billion working capital shortfall: on 29 July 2022, its lenders advanced a new short-term borrowing facility of R600-million, which is now due for repayment. The lenders have told the 130-year-old sugar producer that they are unable to support its restructuring plan or to provide the additional funding required, calling in the debt.

After taking extensive legal advice, the board said that without the required additional funding, and an extension of the repayment date of the borrowing base facility, Tongaat Hulett faced circumstances constituting “financial distress” within the definition contained in section 128 of the Companies Act 71 of 2008.

It has therefore commenced with voluntary business rescue proceedings, appointing Trevor Murgatroyd, Peter van den Steen and Gerhard Albertyn of Metis Strategic Advisers as its business rescue practitioners. 

Tongaat Hulett’s Botswana, Mozambique and Zimbabwe sugar operations are not financially distressed and are unaffected.

Business rescue provides financially distressed companies with a period during which the rights of claimants to take action against the company are suspended. The business rescue practitioners are expected to convene meetings with employees and creditors within 10 days.

Tongaat CEO Gavin Hudson said in a statement on Thursday: “Although this is not the outcome we were hoping for, the start of business rescue is not the end for Tongaat Hulett’s South African operations. 

“Business rescue provides a legal framework that allows the business rescue practitioners to work with key stakeholders to find optimal solutions to our financial difficulties. Tongaat has a proud 130-year legacy and is a significant player in agriculture in South Africa. We have dedicated people working very hard to find the best way forward, and the leadership team is committed to working closely with the business rescue practitioners to ensure a successful outcome to the restructuring of the company that protects those associated with Tongaat.”

Tongaat Hulett’s shares will remain suspended on the JSE. BM/DM