By Staff Reporter
Preference shares and independent business advisors for selected businesses on the brink
As a potential alternative to liquidation, the Development Bank of Namibia has announced the approval and launch of a Business Rescue Programme for eligible enterprises it has supported. The scheme involves converting some debt into different forms of preference shares that the Bank will hold in the company. It also involves sending independent business managers to these firms to provide technical and management advising services.
Speaking about the program, Martin Inkumbi, CEO of DBN, noted that many firms are now at a stage where they are barely able to function due to a confluence of pervasive unfavourable economic realities. To be able to continue lending to other borrowers, the Bank must raise its capital. To maintain the anticipated development impact, the Bank responsibly tries to strike a balance.
Inkumbi provided evidence for this claim by stating that the Bank considers the creation of employment opportunities, owner income, preservation of owners’ capital, preservation of owners’ assets, contributions to local, regional, and national economies, and continued economic growth as justifications for trying to preserve businesses. He emphasized that the Bank works as hard as it reasonably can to protect the companies it has supported and, whenever possible, strikes an advantageous balance between the borrower and the Bank.
Inkumbi provided a detailed explanation of the initiative and stated that DBN will soon name independent company rescue advisors through an open hiring procedure. Once a struggling business has been assessed by an advisor, the advisor will offer suggestions for a turnaround plan. The turnabout plan will highlight adjustments that must be made to the company’s management, governance, and/or capital structure.
The Bank may think about changing a portion of its debt to the Bank into different patient financing mechanisms, including convertible preference shares if the capital structure is not suitable.
Inkumbi continued by saying that because of the preference shares, the Bank has the option to ease its loan repayment terms for a portion of it in anticipation of the shares’ increasing value and yields. Owners, he asserted, would always have the first option to sell their shares back to DBN or, with its approval, to arrange for a transfer to a third party.
The Business will be contractually required to achieve a number of milestones determined by the Advisor and agreed upon between the Business and DBN throughout the period in which the Bank holds Preference Shares.
Once the business is on its feet again, DBN will exit the preference share arrangement, preferably by selling its preference shares back to the original owners.
The first task of the business turnaround advisor, Inkumbi elaborated, will be to ascertain if the business can be rescued. If not, the Bank will have to begin steps to recover its loans through the normal liquidation process. If the business can be rescued, the advisor will make recommendations on management, capital structure and governance which the enterprise will be contractually obliged to implement. In some cases, control of the management of the business could be transferred to mutually agreed business managers with the expertise to help manage the enterprise out of a loss-making position.
Where changes to the business’s capital structure (i.e. the debt to equity ratio) are required, the advisor will be able to either assist with bringing equity investors on board or recommend the conversion of DBNs debt to preference shares. Through this conversion, DBN will hold preference shares in the business for a limited period only. The aim is always for the Bank to exit and transfer full ownership and control of the business to its owners or new investors or a combination of both.
Asked about resistance to the advisors, Inkumbi said the programme is voluntary. There will be a consultation between the Bank and the distressed business owners. Where a distressed business owner is not willing to accept the terms and conditions of a rescue program, they can always opt to repay the Bank’s loan or alternatively face liquidation.
Inkumbi stated that the terms of reference for independent advisory services have been drawn up, and they emphasize high degrees of experience and skills. The Bank believes that some businesses fail due to poor management and lack of financial control.
On the topic of eligibility, Inkumbi said that not all businesses in distress would qualify or meet the criteria of the business rescue program. There must be some level of business activities happening and revenue generation. Ideally, such a business must be in a position to at least partially meet its loan repayment obligation to the Bank. The Bank will not convert full debt into a preference share instrument. The owners must also be committed and willing to make further capital investments and meet the Bank halfway.
Although this is a rescue programme, it is an opportunity for businesses to make strides towards a sustainable future, Inkumbi concluded.