Sikonathi Mantshantsha
Peermont Global planned to swap euro-denominated bonds for rand debt to cut costs after local yields tumbled and Standard & Poor’s (S&P) reduced its credit-rating outlook, South Africa’s third-largest casino and hotel operator said.
The company wanted to do an early settlement of e416 million (R4.1 billion) in securities due in April 2014, chief executive Anthony Puttergill said. Converting the securities into rand from the euro would end the need for hedges, which pushes up the cost of the debt to 14 percent, above its 7.75 percent coupon rate.
Corporate borrowing costs are dropping as yields on rand government bonds due in 2021 fell 138 basis points this year to 6.58 percent as of 4.20pm in Johannesburg, within eight basis points of a record low. The gap between South Africa’s euro debt due in 2016 and similar maturity German bonds has narrowed 114 basis points in 2012 to a low of 196. S&P, which rates Peermont six levels below investment grade at B-, cut its outlook, anticipating the company would struggle to pay its liabilities.
“It’s preferable to have rand debt if your revenues are in rand,” said Jana Kershaw, a credit analyst at FirstRand’s Rand Merchant Bank. “Most South African companies can raise debt cheaper in the rand market than going abroad. With bond yields and interest rates at all-time lows, now is the ideal time to issue local debt.”
Consol, Africa’s biggest glass maker that was bought by a group of investors led by private equity company Brait in 2006, planned to use a more ”attractive and cost-effective package” with local lenders to redeem its e420m of 7.625 percent of bonds due in April 2014, the company said.
“The local debt solution obviates any refinance risk” closer to maturity, while reducing Consol’s exposure to currency swings, it said.
Peermont sold the equivalent of $1.1bn (R9bn) of debt to finance a 2007 buyout led by the Mineworkers’ Investment Company (MIC), a unit of the National Union of Mineworkers.
This includes the 2014 notes, R1.27bn of 18 percent senior payment-in-kind (PIK) notes due in April 2015 and R4.2bn rand of so-called junior PIK loans due in 2037.
The company was in talks with bondholders to refinance its debt, Puttergill said. “The capital of the company needs to be restructured with less debt in order to provide further cash flow headroom and enhanced flexibility to pursue certain growth opportunities.”
Talks with bondholders were “now moving faster” after two years of “on-and-off” negotiations, Mary Bomela, the chief executive of the MIC, said.
The MIC owns 33 percent of Peermont. The hotel company was considering selling local debt, bank loans, converting its debt into equity or a recapitalisation from shareholders as part of changing the capital structure, she said.
In the 12 months to March, Peermont generated cash of R1.05bn, Puttergill said. Peermont had R522m of credit and available cash in the period.
Yields on Peermont’s euro notes dropped 45 basis points to 11.45 percent as of 4.33pm in Johannesburg, the lowest since May 8, according to data compiled by Bloomberg.
“The company is not currently at risk of default on its interest payments,” he said.
Consumer spending is under pressure amid an unemployment rate of 24.9 percent and economic growth that will slow to 2.7 percent this year, according to central bank and government estimates, the lowest since a 2009 recession. The economy expanded 3.1 percent last year. The Reserve Bank unexpectedly cut interest rates to a 30-year low of 5 percent on July 19 to support the economy.
South Africa’s casino industry, which employs about 52 000 people, generated revenues of R17.14bn in 2011, up 5 percent from a year earlier, the Casino Association of South Africa said in January.
Tsogo Sun, which last year combined with Gold Reef Resorts to form Africa’s largest casino company, said on May 17 that earnings a share before one-time items climbed as much as 15 percent as profit margins widened for the first time since 2008. Sun International said on May 9 that gambling sales increased 11 percent in the quarter to March from a year earlier.
“While our hotel occupancies are showing good signs of recovery, from a gaming industry perspective the environment still remains tough,” Puttergill said. “Consumers need to start feeling wealthier before they increase their average spend on gaming.”
Peermont planned to spend R240m to develop the Thaba Moshate Hotel Casino and Convention Resort in Burgersfort in Limpopo, Puttergill said. Development on the 40-room hotel, eight gaming tables and 150 slot machines is planned to start next year. – Bloomberg