Ecsponent: Blue Financial 2.0?

Is it Blue Financial Services all over again for Ecsponent?

The private equity group, controversially funded by R2.1bn of high-yielding preference share issues, has been pulverised by its decision to back MyBucks, a Frankfurt-listed loans and banking specialist in various African markets.

MyBucks was started by none other than Dave van Niekerk, who helped sink microlender Blue, in the process costing shareholders — like Absa — hundreds of millions of rands back in 2009.

MyBucks’s implosion has now pushed Ecsponent to the very edge.

Recently released (unaudited) interim accounts to end-December show Ecsponent in the unenviable position of having its total assets of R1.8bn (including R388m of intangible assets) dwarfed by total liabilities of R3.6bn.

What’s equally eyebrow-raising is that Ecsponent has written down the value of its investment in MyBucks by a hefty R1.2bn.

That is a truly startling sum for a group that holds a market capitalisation of less than R55m — and that after raising R2.1bn from preference shareholders in the past five years.

The numbers, as they stand, would be game over for most companies.

But astonishingly, recently appointed CEO George Manyere is optimistic that Ecsponent can claw its way back from the brink.

MyBucks, started by van Niekerk in 2011, describes itself as a "leading fintech company", with operations in Botswana, Malawi, Mozambique, Uganda, Zambia and Zimbabwe. It provides short-term loans, unsecured credit, banking solutions and insurance products.

But for several years it has been operating at a loss, reaching a record ¤36m or R740m last year.

As with Blue, corporate governance shortcomings and excessive head office costs have played a significant role in its woes, which have forced Ecsponent to pony up as a major shareholder.

In November, Ecsponent helped recapitalise MyBucks through the issue of 63.9-million MyBucks shares to Ecsponent, which helped the loans specialist improve its negative equity of over €40m for the financial year ended June 2019 to positive equity at the end of 2019.

Ecsponent exchanged its loans to MyBucks — along with "predetermined assets" valued at R450m — into MyBucks shares at a subscription price of €1 a share.

This meant Ecsponent’s 43% shareholding in MyBucks was made at an average price of €3.04 a share.

But the closing price for MyBucks on Friday was €0.52c.

Ecsponent has disclosed that MyBucks now holds debt of €42m (about R855m) compared with €110m (R2.25bn) at the end of June last year.

Ecsponent says that based on prevailing market conditions, MyBucks will postpone a planned rights offer until "further notice" and focus on internal restructuring measures in the interim.

Manyere admits mistakes were made. "Ecsponent’s internal single counterparty exposure thresholds should have limited the exposure it has to MyBucks," he says.

"This exposure came about due to Ecsponent having been the primary funder of MyBucks subsidiaries in SA, Botswana and Eswatini, and other indirect companies connected to MyBucks former CEO and founder [Van Niekerk]. This resulted in the success of Ecsponent being inextricably linked to that of MyBucks," he tells the FM.

Manyere says that during the past few years, when the MyBucks fintech model was attracting significant valuations in Europe, the exposures seemed to have been reasonably secured.

But turning MyBucks around is not the only challenge.

Ecsponent now has to convince preference shareholders — who the FM can’t imagine are charmed at developments — to accept a restructuring of their high-yielding arrangements.

As things stand, Ecsponent is already not in a position to redeem preference shares that have fallen due, and it can’t make the demanding ongoing dividend payments either.

Ecsponent’s preference share memorandum provides for a default conversion of the preference shares into ordinary shares if the group fails to redeem preference shares within three months of the redemption date, or fails to declare three consecutive monthly dividends.

This has already happened to preference share classes that fell due in early March.

But instead of forcing these preference shareholders in June to convert to ordinary shares — valued at 5c at the time of writing — Ecsponent has proposed a change that would allow preference shareholders to retain their preference share investments and rights.

Preference shareholders don’t exactly have much of a choice — the default option would effectively hand them control of a financially stressed investment company.

The value-salvaging premise is that the preference shares will be redeemed at a later date.

That’s a development that can’t exactly be pondered with confidence at this delicate juncture.

But Manyere contends the restructuring of preference shares and some of the balance sheet debt will immediately resolve the negative equity, and turn it into positive equity.

"We are expecting this to be completed hopefully by the end of June this year."

There has already been one key structural change, with Manyere confirming the disposal of MyBucks’s historical loss leaders — the lending business and the technology research & development unit.

"We are encouraged by the fact that MyBucks’s banking segment has historically always been profitable. We have retained this segment … we do believe that a fully restructured MyBucks has the potential to do well."

But will the turnaround at MyBucks be different to the painful process at Blue Financial Services?

Manyere argues that MyBucks has assets that are materially different from those held by Blue Financial Services.

"More specifically, MyBucks has a profitable deposit-taking banking arm in four countries, namely Malawi, Uganda, Zimbabwe and Mozambique, and these have been retained as the core of MyBucks."

Ecsponent has cut MyBucks’s holding company and technical staff from just more than 100 to fewer than 10, and sold off all loss-making subsidiaries.

Manyere adds that MyBucks also still has strong shareholders in Europe.

The overriding concern, of course, is whether Ecsponent has enough financial traction to steer an ambitious turnaround at MyBucks.

Manyere concedes: "Our balance sheet has definitely experienced a lot of pain as a result of the challenges that MyBucks faced."

But, he says, "we will progress to the next strategic initiatives we have set to further strengthen the balance sheet".

Ecsponent’s other assets are a motley bag and include 32.8% of microfinancier GetBucks, 70% of Invest Solar Africa, 25% of Ecsponent Financial Services, 34% of Ngwedi Capital Holdings, 100% of Ecsponent Credit Services, 70% of MHMK Capital and 51% of Zimbabwe-based Chrome Valley Mining.

Manyere says that ideally Ecsponent would want to see a dilution of MyBucks’s concentration in its portfolio.

Hopefully this will be achieved through growth in other assets, and not by falls in MyBucks’s share price.

Further setbacks at MyBucks would almost certainly see Ecsponent tipping over the precipice.