Group faces the dreadful truth
In response to criticism, both real and rumoured, on 12 February, Resilient Reit Limited – which has been notorious in these columns since 2011 – issued a statement via the Stock Exchange New Service (SENS) which began:
“Resilient is satisfied that market participants have a thorough understanding of the investment case the Company offers. Resilient will continue to engage constructively with its auditors, investors, analysts and the JSE with the purpose of disclosing all the information required to conform to applicable standards.
“It is for the market to judge whether a narrow focus on tangible asset value provides an adequate reflection of the investment case for Resilient or any of the companies it has invested in.”
It went on to list a number of other factors – such as quality of management – which influence how a share price is arrived at.
(In their assessment recent critics such as 36ONE have argued that the share prices of companies in the Resilient group are suspiciously high relative to their net asset value, and produced stock exchange data which suggests their share prices may have been artificially stimulated by “deliberate and frequently concealed” inter-group share trading.)
The Resilient SENS statement continued: “The Company does not determine the market price of its shares and 36ONE’s untested allegations of concealment, deception and share price manipulation are not substantiated and will not stand up to independent scrutiny.”
It went on to suggest that 36ONE’s views were more informed by its large short position [it’s plan to profit from speculating on an anticipated drop in the share price] than by objective analysis.”
Resilient’s announcement concluded with an assurance that: “…there is no reason for shareholders to exercise caution in their dealings in the Company’s securities.”
A significant number of shareholders thought differently. At the end of December, Resilient had still been riding high, with its share price at a remarkable R151.16 a share – a 50% premium on top of its Net Asset Value (NAV) of R100.75. Enough to place it in the JSE’s Top 40 companies.
But within two weeks of that February all-is-well SENS announcement, Resilient’s share price had dropped by 55%. It’s three major associated companies had done equally badly, or even worse: Fortress B shares – hitherto a very popular holding – plunged 63%; NEPI Rockcastle was down by 46% and Greenbay Properties down by 49%.
Another bit of trouble that Noseweek foresees lying ahead for the Resilient group directors arises from the fact that many of its more senior employees are now deeply in debt and very unhappy as a consequence of the radical drop in the market value of the group’s shares.
Both Resilient and associated company Fortress have allowed – no, encouraged – their employees to buy the companies’ shares with loans provided by the parent companies. You could get up to 20-times your annual salary as a loan for this purpose.
The result is that there are now numerous young “property asset managers” who had been earning R1.5 million per year who are now R30m in debt to the company for shares worth half that amount.
They are down, therefore, by a cool R10m-R15m. They would have to work for no pay for 10 years to pay off the debt. That’s assuming the companies don’t decide to write off their debts, creating yet another little shock for shareholders. And it’s a dangerous precedent to create: your employees only enjoy the upside of share ownership with absolutely no risk – their employers collect any downside.
We have yet to learn how much is at stake here, either for employees or for shareholders.
The same drama, on a much bigger scale, is unfolding with regard to the Resilient companies BEE trust’s shareholdings, also funded with company loans.
On 31 December 2017, the combined net asset value of the Siyakha Trusts was R4.9billion.
They had borrowed close on R10.3bn to buy their shares. With their shares now worth half their loan debt, the trusts are effectively bankrupt. Conversely, the Resilient companies stand to have to write off half the money they advanced to the trusts.
Until now Resilient group companies have been charging the trusts up to Prime+2% interest on the loans, raking in over R800m in this way each year. Suddenly the party is over.
And then that niggly little question: why lend trusts with an operating/welfare budget of just R20m per year, a massive R10 billion?
Was it perhaps to fund another surrogate in-house trader in the group companies’ shares? To whom was the greatest benefit accruing? Seen another way, questions arise about that forbidden thing called “fronting”.
There is little chance of the trusts finding alternative sources of finance: Currently no banks will accept Resilient group shares as collateral for loans. (Nedbank is already heavily, sadly exposed on this front.)
And when it comes to BBBEE trusts, forget about it! Resilient has already announced it is in the process of “unwinding” the trusts.
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