LAST month, Finance minister Mthuli Ncube announced that the Zimbabwe Asset Management Company (Zamco) vehicle will no longer be absorbing non-performing loans (NPLs) from the banking sector, but indications are that the ratio will go up due to the prevailing macro-economic situation. Zamco stopped acquiring NPLs in Q1 2017 and immediately commenced the resolution stage of the NPLs. Business reporter Melody Chikono (MC) interviewed Zamco CE Cosmas Kanhai (CK) to discuss some of the attendant issues that have arisen since then. Below are the excerpts:
MC: Give us an update on the progress you have made since you began NPL resolution last year.
CK: Since we started resolution, we have made significant progress. As you might be aware, we started our resolution phase around April last year, which means from April to around November, that's about 18 months or so. As at the end of November we had resolved NPLs of around US$241 million in acquired values.
We acquired about US$1,13 billion, so we remained with 892 as of November and if we put that into a ratio, it amounts to amount 28%-29% of the NPLs that we resolved. Our target up to 2025 is to ensure that we resolve at least 12,5% of the acquired NPLs annually, so that by end of 2025 we would have covered all the NPLs we acquired.
So far I think we have made progress and there are quite a number of NPLs which are still under negotiations, which we call debt swaps.
This is the most common method that is being used by the borrowers. You find that most of companies no longer have sufficient capacity to generate revenue to pay their loans, so most of them are opting to either sell their assets and use the proceeds to pay off their loan.
They may do a debt-asset swap, where we do the valuation and they use the asset to pay for their loans. That has been the major contributor and, as of November, we still have some debt asset swaps that we are evaluating close to US$80 million debt asset swaps which were offered by clients.
We are happy with the progress that we are making. Remember when we acquire NPLs from banks, we use Treasury Bills (TBs). I think one of the major achievements is that the TBs have a coupon which is paid half-yearly at 5% and as Zamco, we have been able to pay the coupons, as they fell due since we started the resolution phase last year.
The TBs are slightly around US$900 million as we buy at a discount. Our TBs are different from those normal ones issued by the Reserve Bank, as they are specially for Zamco and when they mature it's Zamco who is supposed to pay with the proceeds from the recoveries. When the coupons are due, it's not the RBZ (Reserve Bank of Zimbabwe) that pays, but Zamco. They are not fictitious as they are assets that are there.
MC: What are the main challenges you have been facing in the resolution stage?
CK: The major challenge is that most of these borrowers are distressed companies and some of them are required to pay capital gains tax. And this has been the major challenge as it took time for us.
Using an asset is as good as a sale, so they are required by Zimra to pay capital gains tax. The other one, is that when we resolve NPLs, it takes time to turn them around. There were some companies who had potential, but when the foreign currency shortage crept in it affected companies that were on the verge of turning around.
In our view, the micro-economic environment had an effect on these companies, in particular the forex issue we faced, as we tried to resolve the NPLs.
MC: Which sectors had the highest numbers of NPLs that you acquired?
CK: The biggest, obviously, is agriculture. About 43% of the NPLs are agro-based and the others are fairly distributed among various sectors. Zimbabwe is an agro-based economy. Because of drought and other factors, farmers have over time failed to pay their loans resulting in high NPls.
MC: You once indicated that there was a scramble for investment in companies that have been rescued by Zamco. What has been the foreign appetite component like?
CK: It was mainly foreign companies that were interested, not the local companies. The momentum was let's wait for the election. Most of them have done due diligence. Some of them were not interested in the Zamco debt, but the equity.
However, after the elections, we have seen some of these potential investors making a decision to study the situation further, before making a move. For some, it's now a wait-and- see, but some are still doing their due diligence. We don't know when they will conclude.
We have seen much of the appetite in agriculture, where some were coming for contract farming. With companies, we have seen appetite in terms of requesting for information and conducting due diligence. But in terms of now coming to sign the takeover garment, that's where we see much "wait-and-see" issues, especially after what happened in October, when foreign currency issues resulted in prices going up at alarming levels.
We expect these things to be temporary once the government addresses macro-economic questions because there are things that we cannot control, but government (can).
MC: You spoke about debt swaps. Now let's talk about debt-equity conversion.
CK: Debt-equity conversion, that's where we convert debts into equity, where we see a company needs balance-sheet restructuring, rather than restructuring the loan. So, when we do that, we become shareholders in that company, for example, what we did with Starafrica, where we acquired 58%. But we only do that with listed companies, so that when things go wrong we just go on the stock market and sell our shares. At the moment we don't foresee a good potential for debt-equity conversion because normally we look at the potential of the company, but, normally, listed companies are not keen as they see potential in them and it has to be agreed upon.
The component of listed companies is just five, we don't have much on our portifolio.
MC: What can you say about the turnaround of Starafrica after you took it over?
CK: We are very pleased with its performance. They recorded a profit for the half-year ended September 30 and they have started reducing their losses.
MC: What is your comment on the repayment of loans by the distressed companies?
CK: Repayments are progressing very well because when we took over the loans, our books were put into two categories, with the first being the rehabilitated loans, the second are loan workouts, where we put loans that were being natured or where we put those accounts where we were using other debt resolution methods such as debt swaps, debt-equity swaps, negotiated settlements etc.
A rehabilitated loan is a loan where it has performed for a sustained period of six months in terms of banking regulations (performing loan). In terms of strategy, these ones are now being handled in terms of normal accounting relationship management; they are no longer problem loans.
So far, we have rehabilitated almost $200 million because they are listed as normal and we can send them to banks as performing loans. I think from this portfolio we have received close to US$45 million. If we spread it over a 10-year period we can receive US$200 million, so they are working.
Under the loan workout, that's where debt-asset swaps or debt-equity conversions or private treaty sales are prevalent.
MC: You gave companies an eight-year moratorium. How do you see this assisting in ensuring loan repayments?
CK: It's not every company, eight is the maximum, it depends with business models. Some get five, some three. Remember we have eight as the maximum, so that we will have time to foreclose if there is need, but along the way, as we restructure their loans, we have a timeframe where we don't have to wait for eight years. These are some that we take to when we see that nurturing is not bearing fruits and nothing is coming. it's easier to go for foreclose, so we can't continue entertaining their stories, lest we end up creating NPLs for Zamco.
There are some whom we have sent demand letters to because we would have given them a timeframe, not much in terms of numbers, but in value they are now close to US$15 million, although it's an ongoing process and when the period arrives we will take them for handover.
Sometimes handover assists, as some will only react after they have received letters from lawyers. We will also be sending information to the Credit Reference Bureau on these borrowers.
MC: What can you say needs to be done to enable companies to own up to their loans?
CK: I think it's a tricky issue because it has become a culture in Zimbabwe, where people don't want to pay their loans.
We need to make our law robust, so that if you are not paying your debts, you cannot access credit anywhere. For me, this is the best condition because if you cannot access credit anywhere, you will be forced to clear your debts. The only way to help curb this is only a robust credit system.
MC: What's your outlook going into the future?
CK: Just like anybody else, we are creatures of hope and we are hoping macro-economic challenges will be addressed, particularly forex shortages, as we are likely to see more NPLs in the current environment.
Overall, in the banking sector, the level of NPLs as at the end of September, had dropped to 6%, so if nothing improves, it will definitely go up.
We have set annual targets of 12,5%. so far we have surpassed our targets for the year, mainly assisted by debt swaps. It's our wish to continue moving at that pace.