BEE deals do not exist in isolation

2011-07-30 14:04

As the debt crises in Europe and the US deepen, South Africa’s BEE deals face grim prospects again after receiving a heavy battering less than three years ago, analysts told City Press this week.

BEE deals may be currently under threat as the underlying company share prices face the prospects of plummeting in conformity with international markets.

In 2009, most BEE deals – signed when the South African economy was booming – lost billions in value due to the global economic downturn.

These deals, designed to transfer significant ownership in South African companies to black people, were financed by major financial institutions and vendors.

The ability of the new owners to service the financing arrangements in these transactions depended principally on the profitability of the entities in which they are investors.

Ajay Lalu, Black Lite consulting managing director, said the current economic crisis in the eurozone and the US’ deficit meant that BEE deals were far from being out of the woods.

Lalu said: “In my view we have not fundamentally addressed the current shortcomings of BEE structures and when the next global crisis hits us (which may be sooner than we expect) we will find ourselves in the same situation yet again like we did in 2000 and again in 2009.”

Lalu has always been critical of special purpose vehicles (SPVs), which are financial arrangements often used in most BEE deals, saying they are unsustainable but funders continue to use them because of the fees these structures generate.

Lalu believes that SPV models are a failure because they are premised on increasing share prices rather than cash flows.

Rian le Roux, the chief economist at Old Mutual Investment Group SA, this week advised South African investors to brace themselves for considerable market volatility in the months ahead.

He said this was on the back of rising concerns over fiscal contraction in Europe, budget clashes, slow growth in the US and slowing growth in China.

“With fiscal tightening looming large in many big economies including the US, UK and most of Europe; and the global recovery having lost momentum (again), it is the combination of slowing growth and the acute debt problems in Europe and the US that are causing the most worry,” Le Roux said.

“Political brinkmanship in the US is threatening the triple-A rating of US Treasury bonds. Failure to raise the debt ceiling and/or to effect a meaningful reduction in the budget deficit over the medium term could cause considerable turmoil in global financial markets.”

Paul Janisch, the CEO of BEE consulting firm Caird, said it was highly unlikely that the BEE deals, which were said to be underwater in 2009, had recovered.

He said: “Most of those deals were concluded during the boom economy, back when all was flying.

“Share prices would need to return to those levels before the BEE deals come back.”

James Formby, the head of corporate finance at Rand Merchant Bank, said deals struck just before the global financial crisis were likely to be the ones at risk.

“Deals done post the crisis have been more conservatively structured and have typically had lower levels of gearing to ensure the structures can withstand share-price knocks,” Formby said.

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