ZamSugar: The Anatomy of a “PAAR” Deal
Agriculture, Zambia Sugar Plc

In their 2016 Annual Report (AR), ZamSugar (of the Illovo fame) reported commencement of an important project that would turnaround the fortunes of the company. The Product Alignment and Refinery (PAAR) project was the company’s signal to the market that they intended to reinforce their resources and enhance their capabilities. However, for a project of such magnitude, their management team had to make an important decision regarding how they would finance this ambitious project.

Normally when a firm is presented with the decision of seeking finance, there are a number of options that they can consider. Share or rights issues if it is a listed company is one of them. Pumping in more equity is another. Courting lenders is another. However the final decision is based on what the balance sheet shows. This is the heart of where a firm can actualize its ability to attract funding because by reviewing its revenue generating assets can give it an indication as to whether or not it will be able to service the repayments when they fall due.

ZamSugar opted for a syndicated bank loan for the purpose of the PAAR project. The scale of project demanded for funds that would normally not be released by one bank in Zambia. Although the roster of banks which included Barclays Bank, Stanbic, Citibank and Zambia National Commercial Bank Plc (according to the 2017 ZamSugar AR), show institutions that from a global perspective would easily have taken on the honors of financing the project singularly, they opted to come in as a pack. Very clever, if you consider spreading ones risks. We are sure it had nothing to do with the facility being a Kwacha based one at a time when the kwacha was struggling to find its feet against the global elites of currency (the Kwacha is currently the best performing currency in Africa for 2017 and we are proud it).

The mechanics of the deal involved issuing a loan that was repayable in eight equal installments commencing in January 2017 and attracting interest at the ruling 182 day Treasury bill interest rate at the beginning of each interest period plus a 2.5% margin.  This means that the CFO at ZamSugar would be keeping a close eye on what BOZ rates are available for “Tee Bills” at the beginning of each period.

With a weighted average effective interest rate on the loan of 26.26% per annum, the loan was secured by way of a first legal mortgage over all fixed property to which the company holds title, a first fixed charge over all property, plant and machinery, a first agricultural and floating charge over agriculture assets, crops and stocks and assignment of all present and future rights and claims to material contracts, insurances and all other receivables (according to 2017 AR). At face value that’s a lot at stake. However, an assessment of the company’s balance sheet and income statement, they were a sure bet.

With repayments due, investors will be concerned with the capital outlays in each period. An assessment of repayments due from 2017 onward show 18% of the total debt will be paid in 2018, 8.8% in 2019, 8.8% in 2020 and 64.4% in 2021 and beyond. This is clearly one of the benefits of a syndicated facility. It is determined by pattern the 4 banks had adopted in the draw-down of the facility.

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