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AFRISTRAT INVESTMENT HOLDINGS LIMITED - Business Update, Event of Default, Proposed Debt Restructuring, Capital Raise and Cautionary Announcement

Release Date: 12/05/2022 15:00
Wrap Text
Business Update, Event of Default, Proposed Debt Restructuring,  Capital Raise and Cautionary Announcement

AFRISTRAT INVESTMENT HOLDINGS LIMITED
Incorporated in the Republic of South Africa
Registration number: 1998/013215/06
JSE Code: ATI - ISIN: ZAE000287587
Debt Issuer Code: ATID
Hybrid Issuer Code: ATIG
(“Afristrat” or “the Company”)


Business update on legal actions, Event of Default, proposed debt restructuring,
rationale for a capital raise and Cautionary Announcement


The board of directors of the Company (“the Board”) wishes to provide an update on matters
of the business, pertaining specifically to legal actions, a proposed debt restructuring and
rationale for a capital raise.

Legal Action

Over the past two years and as part of the Company’s restructuring process over this period,
Afristrat has completed two forensic investigations and initiated a further forensic investigation
conducted by MyBucks S.A. (a company incorporated under the Laws of the Grand Duchy of
Luxembourg and hereafter referred to as “MyBucks”) and in which Afristrat owns a 42.39%
stake, regarding:

•     The inappropriate use and distribution by the former CEO of the Company (“Former
      CEO”) of a significant part of a USD10 million loan financing facility provided to the
      Company by SATF (a United Kingdom based debt provider), which use and distribution
      was not approved by the Board and resulted in a significant loss to the Company while
      the indebtedness to SATF has remained (“SATF Investigation”).

•     The implementation by the Former CEO of a ZAR100 million investment by the Company
      into a preference share structure of VSS Financial Services Proprietary Limited (“VSS”),
      a wholly owned subsidiary of MyBucks registered in South Africa, in a manner inconsistent
      with the approved Board position at the time, which resulted in a total loss by the
      Company of this amount (“VSS Preference Share Investigation”).

•     The further investigation into the activities of VSS, being the ultimate recipient of diverted
      funds being borrowed from the Company by MyBucks’ subsidiaries in South Africa and
      Eswatini under misrepresentation of growing the MyBucks loan book in South Africa and
      Eswatini (“VSS Investigation”).

Details of the aforementioned investigations have been published in various SENS
announcements and are set out in paragraph 18 of the circular distributed to ordinary and
preference shareholders dated 13 December 2021 regarding, inter alia, the proposed related
party acquisition by Afristrat of MHMK Financial Services Limited (“MHMK Financial Services”).

Further to the above forensic investigations:

•     Getbucks Zambia Proprietary Limited (“Getbucks Zambia”) has further initiated a
      forensic investigation to establish how the funding raised from Mintos from 2017 was
      utilised. The investigation is focusing on whether the funds raised from Mintos were
      utilised in terms of the funding agreements with Mintos and/or utilised in the best interests
      of Getbucks Zambia. This investigation is ongoing.

•     FirstCred Limited (Previously Getbucks Limited Botswana) has further initiated a forensic
      investigation to establish how the funding raised through its BWP500million Bond
      Programme in 2017/2018 was utilised. The investigation is focusing on whether the funds
      raised on the Bond Programme were utilised in terms of the Bond Programme
      Memorandum or whether the funds where irregularly disbursed to MyBucks or its related
      entities and never repaid back to FirstCred Limited in cash. This investigation is ongoing.

In addition to the aforementioned VSS Investigation, the MyBucks board of directors (“MyBucks
Board”) completed an internal compliance review into the historical activities of MyBucks and
certain of its subsidiaries which triggered the Preference Share Conversion by the Company in
May 2020 (“MyBucks Compliance Review”). Some of the key findings from the MyBucks
Compliance Review are as follows:

•     Certain key founding shareholders of MyBucks monetised their shareholding in MyBucks
      (without disclosure to the MyBucks Board or the Frankfurt Stock Exchange where MyBucks
      was listed, as would have been in line with good corporate governance procedures) via
      borrowings from their related companies in South Africa and Botswana obtained from the
      Company against these shares, for an estimated aggregated amount of EUR22 million,
      and eventually defaulted on these loans. Subsequent settlement of these loans was done
      with the pledged MyBucks shares to the Company at a price per MyBucks share that
      ranged between EUR10 – EUR15 between 2015 – 2018. However, MyBucks was
      subsequently found to be in a negative equity position of approximately EUR42 million as
      at 30 June 2019.

•     Approximately EUR28 million of Afristrat funds were borrowed by MyBucks’ subsidiaries
      in Botswana, Eswatini and South Africa under the pretext of growing the MyBucks loan
      book. However, less than EUR10 million was applied towards this, and the balance was
      diverted by the MyBucks management and spent on overheads and interest expenses
      without clear disclosures to and approval from the MyBucks Board, thus negatively
      compounding the financial viability of MyBucks.

•     Approximately EUR15 million was borrowed from Mintos, a European lender to MyBucks’
      subsidiaries in Botswana, South Africa and Zambia under the pretext of growing the
      MyBucks loan book. However, the bulk of this amount was diverted by MyBucks
      management and spent on overheads and interest expenses without clear disclosures to
      and approval from the MyBucks Board, which negatively compounded the financial
      viability of MyBucks.

•     Approximately EUR5 million was borrowed from Norsad by a MyBucks subsidiary in
      Mauritius for on lending to another MyBucks subsidiary, MBC Mozambique. However, the
      funds were converted into equity without the approval of the lenders and/or the MyBucks
      Board which created a severe liquidity mismatch that negatively compounded the financial
      viability of MyBucks.


Ultimately, Afristrat lost in excess of ZAR1.5 billion of equity value in MyBucks and its
subsidiaries through debt which was provided under the pretext of growing the MyBucks loan
book. However, as detailed above, such debt was substantially diverted to meet MyBucks
management overheads and interest expenses from other borrowings being converted into
equity in MyBucks.

Following engagement with its legal advisors, the Board wishes to advise on the actions taken
in respect of the aforementioned investigations:

•     Based on the recommendation of the legal advisors on the SATF Investigation and the
      VSS Preference Share Investigation, the Board has given instructions to its attorneys in
      South Africa and Botswana to institute civil claims in the amount of R250 million against
      the responsible former executives at the Company and/or MyBucks.

•     Based on the recommendation of the VSS Investigation and the MyBucks Compliance
      Review, the Board has instituted a ZAR800 million claim against MyBucks. Due to the
      complexities of Luxembourg laws and cost of litigation, the Board is currently considering
      its options in order to potentially also institute civil claims against the previous
      management, directors and auditors of MyBucks, where considered appropriate.


Event of Default and Debt Restructuring Initiative

Prior to the acquisition of MHMK Financial Services, the Company’s liabilities included:

•     ZAR881.5 million related to various debt instruments (“Legacy Debt Instruments”),
      including fixed rate, floating rate and zero-coupon notes (“Notes”) issued under the
      Company’s ZAR10 billion domestic medium term note programme dated 21 August 2018
      (“Programme Memorandum”) in the amount of ZAR174.1 million, with the majority of
      remaining balance consisting of other financial liabilities and creditors; and

•     ZAR521 million related to hybrid preference shares (“Preference Shares”).

The Board has performed a comprehensive review of its ability to continue to service these debt
and hybrid instruments which considered, inter alia:

•     the bankruptcy of MyBucks and subsequent court-appointed Receiver assuming full
      control of MyBucks, as announced on SENS on 16 February 2022 and 23 February 2022,
      respectively;

•     the ongoing monthly costs required to service its debt instruments considering the lost
      value of previously invested funds;

•     the ability of the Company to raise new equity or debt funding to fund the growth of its
      underlying remaining investments given the current remaining on-balance sheet debts;

•     ongoing negotiations with a number of institutional debt holders;

•     the ability of Afristrat’s remaining underlying investee companies to provide liquidity to
      Afristrat to service its debts; and

•     Afristrat’s ability to timeously rebuild its remaining underlying investee companies in order
      to service upcoming future debt capital redemptions.

Based on this assessment, the Board has concluded that:

•     Afristrat will be unable to pay any interest or capital due and payable to holders of Notes
      with effect from the date of this announcement which, in terms of Condition 16 of the
      Programme Memorandum will constitute an Event of Default;

•     Interest will however, continue to accrue in respect of the Notes up until the date of
      approval of the offers detailed below:

•     Afristrat will make an offer to current holders of Legacy Debt Instruments to convert to
      ordinary shares in Afristrat, including the holders of the Notes, but excluding:
          -   Trade creditors; and
          -   the recently announced Crosscorn acquisition finance;

•     Afristrat will make an offer to current holders of Preference Shares to convert to ordinary
      shares in Afristrat.

•     The offers are subject to the approvals of the conversion into ordinary shares in Afristrat
      by, inter alia, the holders of the Notes and the Preference Shares, as well as the approvals
      by shareholders of the issue of ordinary shares.

The Board believes the aforementioned offers will provide the Company with the most viable
position to recover from the lost investment value and put the Company in a position to provide
a sustainable basis, both from a solvency and liquidity position, to rebuild value for all
stakeholders.

Details of the offer process, including details regarding the meetings of ordinary shareholders,
Noteholders and Preference Shareholders to obtain the requisite approvals pursuant to the
offers, as the case may be, will be published on SENS in due course.


Capital Raise

The Board refers to the Going Concern disclosures set out in the Company’s Annual and Interim
Reports for the last two years which indicated that the Group faced severe liquidity constraints
and that the auditors had provided a material uncertainty related to the liquidity position of the
Afristrat group.

In order to address the liquidity constraints, and together with the Debt Restructuring Initiative,
the Board wishes to advise that it will commence a Capital Raise process to raise R60 million of
cash funding from its current shareholder base, in order to:

•     settle long outstanding creditors with an approximate value of ZAR25 million, a number
      of which have already commenced legal actions against Afristrat;

•     provide working capital to support the requirements for the next twelve months and to
      support legal costs for the legal actions initiated, amounting to approximately
      ZAR15 million; and

•     provide ZAR20 million of funding in order to support and provide a catalyst for the growth
      of the underlying remaining investments of Afristrat.

The Capital Raise process will be performed through a private placement book build process
under the Company’s general authority to issue shares for cash approved by shareholders at
the annual general meeting of 5 November 2021, which shares will be issued at no greater than
a 10% discount to the 30-day VWAP. Afristrat’s largest shareholder, MHMK Group Limited, will
underwrite up to ZAR15 million of the ZAR60 million on a pro-rata basis to support the Capital
Raise process.

The Capital Raise process will include Investor Roadshows, details of which will be announced
on SENS in due course.


Cautionary announcement

Shareholders are advised that the outcome of the above restructuring initiatives may have a
material effect on the price of the Company's securities and accordingly, are advised to exercise
caution in dealing in the Company's securities until a further announcement is made.

For more information about this announcement or the Afristrat group, email
investor.relations@afristrat.ltd or visit www.afristrat.ltd/investor-relations/



12 May 2022
Pretoria

Sponsor
Merchantec Capital

Date: 12-05-2022 03:00:00
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