ROB ROSE: Why the banks pulled the plug on Tongaat

Tongaat CEO Gavin Hudson evidently thought he had the “restructuring plan” for his ailing sugar company sewn up, when he announced it publicly two weeks ago. So it must have been a blue Monday for Hudson when, on October 21, he got a curt response from Tongaat’s banks, effectively saying: we don’t accept your revival plan, and we need you to repay the R600m loan given last July immediately.

In that moment, all Tongaat’s travails of the past four years — a R12bn fraud second only to Steinhoff in scope, a sugar market asphyxiated by cheap imports, riots that cost it R158m, and a huge R11.7bn debt — coalesced into one imperative: keeping the 130-year-old company alive.

In an affidavit he signed later to justify placing Tongaat in business rescue, Hudson says the banks had “been supportive” for years, but have evidently drawn a line in the sand. It’s a decision of much gravity, as Tongaat’s survival is crucial for KwaZulu-Natal — with 500,000 people relying on the company across the region.

So how did relations between Tongaat and its bankers sour? And how do these institutions brag about “solving joblessness” while doing something that guarantees precisely the opposite?

First, it must be pointed out that it’s not just one bank that is involved. Standard Bank is the largest lender, but the consortium also includes FirstRand, Nedbank, Absa, Investec, Sanlam, Momentum Metropolitan, the Land Bank and Ashburton.

Lamentably, most of those lenders were struck dumb this week when asked by the FM to justify their decision.

Nedbank dodged the question, saying only that it would provide “emergency liquidity” to Tongaat. FirstRand boasted that it “remains deeply invested in job creation, and the societal impacts”, but failed to explain how that mission squared with cutting Tongaat’s funding. 

Absa only confirmed what everyone knew, while Sanlam ignored the question. Investec said it had supported Tongaat’s rehabilitation for three years, “but these initiatives have not yielded feasible or sustainable outcomes”.

The only bank with the courage to defend its decision was Standard Bank.

Kenny Fihla, CEO of corporate and investment banking at Standard Bank, told the FM that while his bank had supported Tongaat, its rehabilitation plans had yielded little. “When the fundamentals of the business aren’t healthy, it becomes reckless lending when it doesn’t look like they’ll have the ability to repay further loans. If anything, things are getting worse,” he says.

Hudson, no doubt, will point to the fact that Tongaat has actually repaid a bucketload, cutting its debt from R11.7bn a few years back to R6.3bn now.

“Yes,” says Fihla, “but if you sell assets to reduce debt, while your day-to-day cash generation hasn’t improved, then things aren’t really getting better. Your fundamentals haven’t improved, and what happens next month when you have to pay salaries?” 

He says Standard Bank does take into account the impact of its decisions on the wider KwaZulu-Natal economy, “but if an entity presents a plan that doesn’t give us a sense that they’ll be viable, we have no option but to stop extending credit”.

He is adamant that it would be “wrong and unjustified” to blame the banks. “We don’t run the company — it’s the management and the board that do. So it’s irresponsible to abdicate responsibility and blame the banks if they’re not financially viable, and we can’t extend further credit,” he says.  

Now, it is obviously true that Hudson’s headache wasn’t of his making: the fraud was constructed during the era of his predecessor, Peter Staude. But it’s also true that the banks are lending out depositors’ money, so they can’t act with all the abandon of a Gupta brother dishing out cabinet positions.

Privately, the bankers are fuming that they weren’t shown Tongaat’s “restructuring plan” before it was made public, and yet have been blamed for rejecting a plan they considered “ill-conceived” and “naive”.

The deeper problem, however, is that the banks don’t seem convinced that the local sugar business is viable. As Fihla says, South African sugar is struggling — with imports and sugar taxes just two of the issues. But this is the pivotal point: if the sugar business is irretrievable, you needn’t bother with business rescue.

“Except that’s wrong — this can definitely be fixed,” says one insider. “Tongaat’s business needs to be resized and repositioned — the industry could close some mills, for example — but you don’t need to sacrifice the entire north coast to do that. This is an industry that’s not going away.”

This is underscored by the fact that Tongaat’s rival RCL, owned by Remgro, is going gangbusters. Last year, RCL sold 677,000t of sugar produced in Mpumalanga under the Selati brand, clocking up revenue of R9bn and pretax profit of R817m.

But unlike RCL, Tongaat didn’t come close to crushing its full crop, producing 460,000t of refined sugar last year, despite the fact that its milling capacity extends up to 600,000t. “That’s the difference between a decent profit, and a loss,” says the insider.

Ironically, Tongaat seems to be finally getting on top of this, and it’ll probably produce more than 500,000t this year. 

Hudson alludes to this in his affidavit. “Our production this year is by far one of the best we have seen. Yields are good, everything points in the right direction,” he says.

One good sign is that the banks told the FM they’d be willing to provide “post-commencement financing” to Tongaat.

All of which suggests it is not the end of the road for Tongaat. Which is just as well: KwaZulu-Natal, and its battle-scarred residents, can’t afford too many more hits right now.