CASE STUDY

CNG Holdings

The investment in CNG Holdings supports government initiatives for clean fuels, reduction in emissions, diversification of transport fuels and skills development.

Risk profile of IDC’s book

Credit risk

Impairments (IDC Company)

IDC’s level of impairments has been increasing gradually in recent years, with the ratio of impairments as a percentage of the portfolio at cost rising from 15% in March 2009 to 18% in March 2013. This reflects the Corporation’s increased risk appetite towards distressed clients, as well as other ailing industries, such as the textiles industry. It also reflects IDC’s increased focus on early stage projects and start-up companies.

The impairment and write-offs charge to the Income Statement of R2 268 million for the year ended 31 March 2013 was 38% higher compared to financial year 2012.

The main reasons for impairments included the deterioration in trading conditions together with low market penetration. This pointed to the slow economic recovery following the economic downturn. Depressed commodity prices and unfavourable exchange rates also continued to impact IDC’s business partners. Business units contributing significantly towards the increase in impairments included: Textiles, Media, ICT and Mining.

Write-offs

The IDC writes off investments when the exposure is considered unrecoverable and only after all viable restructuring options have been exhausted.

During the financial year ended 31 March 2013 a total amount of R470 million was written off. This compares to
R157 million for the 2012 financial year and R722 million for the 2011 financial year.

The Metals (56%), Chemicals (12%) and Tourism (4.1%) SBUs accounted for the majority of the write-offs. The major reasons for write-offs related to the distressed economic environment, non-existence of markets and operational inefficiencies, including delays in commissioning of plant, and raw-material supply-related challenges.

The following analysis is an indication of the ongoing challenges which IDC is addressing through the various restructuring, business rescue and business support attempts conducted by the Workout & Restructuring unit. A high percentage of the business partners written off have a very low probability of recovery, whilst in some instances IDC does indeed recoup amounts already written off.

Capital at risk

Capital at risk is defined as total capital outstanding (excluding undrawn commitments) for facilities with capital repayments in arrears of more than 60 days.

As at 31 March 2013, capital at risk amounted to R6 billion (28% of total capital outstanding) an increase of around
R1.4 billion from R4.6 billion (24% of capital outstanding) at 31 March 2012. The graph below illustrates the growth in capital at risk over the past five financial years:

As at 31 March 2013, R747 million of the total capital at risk was attributable to the Metals, Transport and Machinery Products SBU (Metals), representing an increase of R179 million from 2012. During the economic recession, Metals was adversely affected by the collapse of the steel industry and subsequently the influx of imports of cheap steel products from countries such as China, India and Turkey. Metals business partners are also indirectly affected by the ever-volatile mining industry and the automotive industry that has been struggling to recover fully following the recession.

The second largest contributor to total capital at risk as at the end of the 2013 financial year, was the Mining and Minerals Beneficiation SBU (Mining), at R746 million (an increase of R346 million from 2012), followed by Tourism,
R680 million. Volatility within the mining industry has influenced the amount of capital at risk, while the tourism industry continues to be exposed to fluctuations in the economic cycle.

The IDC’s Post-Investment Monitoring Department (PIMD) is responsible for the proactive monitoring of the IDC’s investments. PIMD ascertains the quality of the IDC’s loan book, identifies early warning signs of deterioration and ensures timeous action is taken to protect the IDC’s interests and to prevent or limit financial losses. Regular meetings of the IDC’s Investment Monitoring Committee (IMC) also assist with the monitoring of the performance of the loan portfolio. Together with PIMD, IMC decides on an appropriate course of action to be taken with regard to non-performing clients, like those classified under capital at risk. The actions that are taken include: raising an impairment, serving the customer with a letter of demand and/or legal action.

Unlisted equity investments

This section focuses on the performance of IDC’s private equity investments as at 31 March 2013. Private equity investments include ordinary shares, preference shares, interest-free shareholders loans and quasi-equity loans.

While the number of private equity investments increased by 11% from March 2012 to March 2013, the fair value increased by only 3% over the same period mainly due to the continued Eurozone economic crises, suppressed commodity prices and a number of equity redemptions. The private equity book is highly concentrated towards commodities, with three of the larger clients accounting for 50% of the fair value.

The performance of the private equity book is assessed based on a weighting of corporate governance and financial performance. As at 31 March 2013, 12% were rated as excellent performers, 36% rated as good, 36% fair and 9% as bad performers. The majority of bad and fair performers are investments within the manufacturing, services, farming and mining sectors. Clients in the start-up phase have not been rated as they are still implementing their business plans and have been in operation for less than two years.

Good and excellent performers require minimal intervention from the IDC. Fair performers require some attention, while bad performers require significant IDC involvement. Some of the mechanisms utilised by the IDC in monitoring its private equity book in order to ensure good performance are as follows:
(a) Attendance of shareholder’s meetings;
(b) Participation in project implementation steering committees;
(c) Appointment of Board members;
(d) Conduct of business reviews based on risk categorisation; and
(e) Analysis of quarterly and annual financial information to monitor compliance with business plan and financial models (budgets thus approved).

Clients at Workout and Restructuring (W&R)

IDC proactively identifies high risk business partners who are financially distressed or who are unable to meet their financial commitments. To prevent failure, we introduce suitable commercial solutions, including restructurings and turnaround strategies. Clients that still have sound business plans or which have reasonable prospects of being viable are assisted in their turnaround efforts, through financial restructuring of their balance sheets, or through the provision of non-financial support, including the appointment of external experts to facilitate the turnaround. W&R also optimises financial recovery of IDC exposures where the financial failure or liquidation of the BP proves unavoidable.

As at the end of March 2013, our W&R portfolio increased by 33% to R8.7 billion (2012: R6.5 billion) in value. This figure represents a total of 283 clients in the W&R portfolio – a reduction from 303 clients in March 2012.

A total of 60 clients with a combined value of R3.2 billion were transferred into the W&R portfolio during the year. Sectors with the highest increases in 2012/13 FY were Media and Motion Pictures (46%), Metal, Transport and Machinery Products (23%) and Tourism (12%) by value of transactions. However, in terms of number, the largest transfers to the W&R portfolio came from Metals, Transport and Machinery Products SBUs. These have also seen the largest number of companies funded from the distress funds.

Recently IDC has supported eight clients through Business Rescue, providing relief and an opportunity to turn around within a protected environment. The biggest challenge with the Business Rescue process is the unavailability of post-commencement funding (PCF), as the environment does not incentivise the provider of funding and the PCF is only secured to the extent of unencumbered assets. Other challenges include the lack of suitably qualified and industry experienced Business Rescue Practitioners as well as the reluctance by secured creditors to participate in the rescue process.

Coega Dairy Holdings

The IDC has identified increased competition in the dairy value chain and import substitution in the cheese industry as key sector development goals. We also singled out the need for increased farmer (and specifically B-BBEE) participation in dairy value-adding initiatives.

Windtown Lagoon Resort 

The newly built Windtown Lagoon Resort and Spa reflects the IDC’s focus to funding community-based projects that have potential to create employment opportunities in far-flung regions.


APPROVALS
R13.1 billion
DISBURSEMENTS
R16.0 billion
JOBS FACILITATED
18 922
JOBS SAVED
3 950
© The IDC 2013. All rights not expressly allowed are reserved. P.O. Box 784055, Sandton, 2146, South Africa