19 March 2019

South Africa: Debt Is Not Necessarily a Dirty Word - but It May Be

analysis

Several SA companies have suffered big share-price declines over the past year, notably drug maker Aspen and sugar producer Tongaat. The common factor among many of the implosions is their high debt levels. Are JSE companies over-indebted and what level of debt should be a red flag for investors?

Drugmaker Aspen has lost almost half of its value since announcing the $829-million sale of its infant-formula business to French dairy giant Lactalis International in September 2018, which experts say has all the characteristics of a fire sale.

The company has been on an aggressive acquisition drive ever since it purchased a chain of local pharmacies in 1999. It started producing Africa's first generic HIV antiretroviral drug in 2003 and expanded into infant formula the year after. But the shopping spree has finally caught up with the company as debt hit R53.5-billion at the end of December.

What has added insult to injury is that the sale of the infant formula business is being held up by regulators in New Zealand, restricting the company's ability to pay down its borrowings, which include a €1-billion loan that matures in May 2020 and a €500-million facility due May 2022, according to data compiled...

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