Quinton van Rooyen’s inauspicious bid for Trustco funding
The proposal suggests Trustco is not able to tap its other big shareholders or secure attractive funding from banks
Controversial Namibian businessman Quinton van Rooyen has made an inauspicious start in his bid to provide up to R1bn in funding for Trustco, the JSE-listed investment company where Van Rooyen is the largest shareholder with an effective 55% stake.
The company, founded in Namibia in 1992 and listed on the JSE in 2009, bills itself as a "high-growth Namibian-based company with a core focus in insurance and investments".
Trustco has been under the governance spotlight for months for many reasons, including a series of odd related-party deals between Trustco and Van Rooyen, who is also its CEO.
Last year, the FM reported that Trustco proposed restructuring its debt and capitalising its new diamond mining ventures, through a complicated scheme that would see Van Rooyen raise loan funding by selling part of his shareholding to current shareholders and new investors. Van Rooyen would then lend the proceeds to Trustco with an option to be repaid in cash and scrip … or even write off the loan.
It is difficult not to view the proposal in an ominous light. For one thing, it suggests the group is unable to tap its other large shareholders (specifically the investment entities associated with US investor Sean Riskowitz) or secure attractive funding from commercial banks.
Van Rooyen’s envisaged "interest only" loan stipulates that Trustco must repay him in one bullet payment, in cash, at the end of March 2024 … unless the Van Rooyen family, via Next Investments, exercises an option to have the capital amount converted into Trustco shares.
But Van Rooyen’s mooted funding plan may well never come close to raising the targeted R1bn. At least not any time soon. The first two tranches of share sales by Van Rooyen raised roughly 1% of the mooted R1bn in loan funding.
The raising of the loan funding was always going to be an interesting exercise, with the Trustco shares woefully illiquid and a lack of institutional investor interest in the stock. The stock itself has also been losing ground — it is down 49% over a single month — so it’s not exactly an easy sell.
Still, in October Trustco envisaged placing shares with "investors that will include, but not be limited to, institutions, individuals, corporates and existing shareholders".
Initial scepticism around the fundraiser appears to be justified, and it seems now that the capital raising could prove a real challenge for Van Rooyen, whose share sales will be closely monitored.
Last year Trustco indicated that "each and any sale of any tranche of the family’s securities would be announced on Sens".
So earlier this month Trustco disclosed that between February 15 and February 20 Van Rooyen’s Next Investments sold small parcels of shares at prices between 801c and R10.92 to raise about R10m.
This sum does not offer much comfort, even if it is true that Rooyen’s share-sale scheme is still at a relatively early stage.
But it’s worth remembering just how critical the loan of R1bn — or a lesser substantial amount — is to Trustco, which has been losing operational steam lately.
Trustco plans to use the loan to transform its Meya diamond operation in Sierra Leone from exploration to full commercial production. The ambitious aim is also to shift production from the current 36,000 carats a year to 165,000 a year, with a longer-term target of 300,000 carats annually. This is high-risk stuff, but it is a carat that Trustco can dangle to wide-eyed investors.
Besides diamonds, a portion of the loan will also be used to lower its debt as part of the current debt restructuring — a critical issue since the strain has started to show at Trustco.
Trustco has been negotiating a formal capital standstill up to mid-June this year with its lenders, which will offer some breathing space to set up a formal debt restructuring agreement.
If it took Van Rooyen the best part of a working week to raise just R10m, one has to wonder at the eventual sum that will be raised by the share-selling endeavours.
Trustco has said that the size of the actual loan may be for a lesser amount depending on its growth capital requirements — "as determined by the independent nonexecutive board members of the company before June 30 2019".
But unless Van Rooyen can find large buyers for a chunk of Next’s Trustco shares then it would be surprising — if sales remain at the same pace — to see more than R100m raised.
From the initial share sale information (there was one sizeable sale of 1-million shares and then some really small parcels of as low as R1,000), it would seem there is not a voracious appetite for Trustco shares in the open market.
The problem now for Van Rooyen is that Trustco shares have weakened markedly in the past two weeks, sinking as low as 701c at one stage. So it remains to be seen whether he has an appetite to release more shares at this lower price. If he does, it might indicate the level of urgency of the need to bring fresh capital into Trustco.
With Van Rooyen a committed seller for the foreseeable future, it also seems doubtful that Trustco’s shares can find too much traction under the strain of such an overhang.
The recent low of R7.01 is some distance off the high of R16 at the start of this year. This sudden weakness will also refocus attention on the staggered conversion option schedule that made plain Van Rooyen’s bullish expectations for the group’s prospects.
That schedule suggested that between January 2020 and April 2020, a portion of the loan can be converted at R21.49 a share based on a maximum issue of 46.5-million Trustco shares. The following years envisage conversions at a rate of R31.91 a share, R42.72 a share, R57.93 a share and R74.79 a share.
Those numbers bank on a flawless performance from Trustco’s fledgling diamond interests — but they look waywardly optimistic at this delicate juncture.