Questions haunt Sharemax arrangement

THE two main shareholders of Sharemax Investments – Willie Botha and André Brand – will receive R40m in exchange for their so-called claims against the Sharemax-promoted property syndications in terms of the proposed scheme of arrangement for Zambezi Holdings.

Of that, R15m is payable in cash and R25m in five yearly payments of R5m each. In exchange, Botha and Brand accept apparent responsibility for outstanding VAT payments that could amount to as much as R50m.

However, the cause and auditing of the amounts owed in VAT aren’t explained anywhere in the documents submitted to the high court.

Businesspeople will know VAT returns must usually be submitted every two months. Postponement and paying off over five years sounds very unusual. Businesspeople will also know that being even a few days overdue attracts considerable penalties. Hopefully, the board of the property syndications will be able to explain the payment to Brand and Botha and the outstanding VAT more fully to investors at shareholders’ meetings over the next few months.
For the financial advisers who sold Sharemax investments to their clients and who were concerned about the capital losses – especially in the case of liquidation – there’s also very good news in the proposed scheme of arrangement. In the case of Zambezi, investors will receive a new “debenture” with a face value exactly equal to their original investment.

Therefore: no capital loss. The capital and the debenture will be repaid from the 70% of the net rental income earned by the Zambezi Mall over the next 10 years, which could be extended to 12 years. That could be any amount – because the days of miracles aren’t yet over.

Investors – as well as the ombudsman, who is already looking at the financial advisers – will therefore only know in 12 years’ time whether the investors have suffered a capital loss or not. This is a wonderful escape for the financial advisers, and explains why they’re so supportive of the scheme on their blogs.

From year 12 to year 17 the investors will receive 30% of the net rental income, up to a maximum of 30% of their original investment. That’s probably interest, or perhaps capital gain.

So it’s possible that investors may still be receiving an interest cheque 17 years after the introduction of the scheme. Once again, that’s very good news for the financial advisers.

Briefly, it means no investor will be able to prove he suffered a capital or interest loss before 17 years have elapsed and can therefore not institute a claim against his financial adviser. The ombudsman will also find it difficult to prove damages before the end of 17 years.

I’m sorry to say that for investors in the Zambezi scheme there’s only bad news. In his submission to the court, Rudolf Badenhorst, one of the new directors of the Sharemax-promoted investment, pointed out the best net price that could probably be obtained for Zambezi Mall in the case of a liquidation would be only about R100m, which is about 13c in the rand for each of the investors who pumped in a total of R765m into the building.

But that’s actually more than Finweek expected.

However, nobody is trying to put a value on the new debentures to be issued, simply because it’s impossible to do so. To calculate the net current value of an investment or debenture that can be compared with the 13c in the rand above, we must do an accurate calculation of the monthly or annual payments the debenture holders will receive: which is 70% of the net rental income earned by the building.

The building is managed by its owners, Capicol, and the investors will apparently have no say in how the building is run or what its net income will be.

If you look at the current poor state of repair and the building’s significant vacancy factor – plus the new interest burden of the probably R10m or more the building will have to carry in future – the informed investor would no doubt guess its net income will be very small, if anything at all. Remember: 70% of nothing is still nothing.

After 12 years an investor’s rights lapse. And if 70% of nothing is still nothing, the debenture won’t be worth anything. The face value of R1 for every rand invested says nothing.

The value of the debentures on an informal market – they won’t be listed on the JSE – is what counts here. I’d like to repeat my prediction of two weeks ago: the market value of the Article 311 debentures will probably not be more than 5c in the rand.

Not 5c/year, as some readers seem to think, but a one-off 5c for your R1 investment if you were to sell. And if an investor were to sell it for 5c – assuming he could find anyone wanting to buy it – he’d presumably no longer have any claim for damages against his financial adviser.

It could simply be argued the 70% of the net rental in nine years will be enough to repay your total investment and you would find it difficult to prove the opposite.

Investors in Zambezi will have to make up their minds at the meetings whether they want to accept the 13c in the rand that could possibly be obtained in the case of liquidation or whether they want to take a chance on a debenture with a completely unknown market value.

* This article was first published in Finweek.

* To read more Finweek articles, click here.

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