Until early January 2018, Resilient employees were laughing all the way to the bank. For years, the property company lent its workers loads of money to buy its own shares.
But with the sharp drop in the value of Resilient’s share price, employees’ life-enhancing profit on their share investment has turned into a life-destroying loss.
The debt on the 8.4m outstanding shares in the employees’ share purchase scheme is approximately R630m.
That wasn’t a problem when, by June 2017, this debt was comfortably covered by the shares, which were valued at just over R1bn. But at the end of March 2018 the value of the shares had slumped to R419m, about R210m short of the debt that’s owed.
These figures help explain why lending money to employees to buy shares has fallen out of favour.
High-profile reports critical of Resilient, and released in January, touched on the possibility that the company used employee share purchasing to bump up the share price.
"In general it’s regarded as bad practice and it’s poor corporate governance," says PwC’s remuneration specialist Gerald Seegers, who also refers to the commercial risk. Seegers says it’s no longer common practice.
By now employees of Resilient know just how bad a practice it is and also what a huge commercial risk it can be. They’re locked in to a debt trap of nightmarish proportions; if the Resilient share price doesn’t recover to at least R75 within the next few years they could find themselves working just to repay the loan on their share purchase scheme.
Leaving the company for fresher debt-free pastures may not be an option as it’s likely to trigger repayment of any outstanding debts. Essentially, they would be realising the losses.
The preferred option appears to be staying put and hoping desperately that the share price will recover.
But as one analyst remarked, staff who are technically bankrupt could present a risk in terms of behaviour and compliance. These are likely to be as bad as the behavioural risks linked to efforts to keep the share price pumping.
Remuneration specialist Nick Icely says there’s a good reason, over and above tax changes, why lending employees the funds to purchase shares has fallen away. The practice tends to encourage perverse behaviour.
Resilient finance director Nick Hanekom seems to think the problem has been blown out of proportion. Asked if Resilient plans to do anything to relieve employees, Hanekom says: "Right now the company doesn’t intend doing anything as employees have 10 years from the date of issue to repay their debt. Shares were issued at various prices over a period of time and the company is mindful of keeping employees motivated."
The 10-year repayment period provides some relief but 2.7m of the 8.4m outstanding shares were issued in 2017, when prices were significantly over R100.
Then there’s the prickly matter of the National Credit Act (NCA), which is designed to regulate credit agreements and credit providers.
In the context of the act, Resilient looks very much like a credit provider and so should be registered with the National Credit Regulator (NCR).
Seegers says the need to be registered with the NCR is another reason for the fall-off in use of loan-based schemes.
Clark Gardner of Summit Financial Partners concurs. "The loans underpinning the scheme make an employer a credit provider," he says.
CEO Des de Beer thinks otherwise. "We obtained an independent legal opinion that the NCA did not apply," he tells the Financial Mail.
Lucky for De Beer, the NCR is not inclined to be proactive. So unless someone provides it with a complete analysis of the matter, there’s unlikely to be any action on that front.
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