• Hwange, Rio Zim, Starafrica debt at $200m
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  • Debts continue growing despite repayments
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  • Companies look up to RBZ
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Darlington Musarurwa Business Editor
\nTHE lagged effect of high interest rates charged on companies, especially after the introduction of the multicurrency system, is beginning to take its toll, with three companies that released their trading updates and interim financials last week — Hwange Colliery Company (HCC), RioZim and Starafrica Corporation — owing more than $200 million to creditors.

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For the three companies, the monstrous debts present a formidable challenge to current efforts to put them back on the rails.
\nAfter the introduction of the multicurrency system in February 2009, many financial institutions levied relatively high interest rates, which at times were as high as 30 percent, as they claimed that more than 90 percent of their deposit stock was short-term or transitory.
\nDebt hauls Hwange over the coals

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In particular, for coal miner HCC, which last year adopted a multi-pronged approach that includes recapitalisation, contract mining, divisionalisation of the organisation, customer diversification and acquisition of new coal concessions as part of efforts to rehabilitate the company, the $100 million debt has been the major obstacle.

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Of the $100 million, it is estimated that $60 million is owed to the Zimbabwe Revenue Authority (Zimra) through overdue pay-as-you-earn (PAYE), value added tax, corporate tax and withholding tax obligations.

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The outstanding $40 million represents the value of litigation cases that have been brought against the company since the beginning of the year.

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Zimra has since launched a tax investigation and the final tax assessment, including penalties, has not yet been issued.
\nWhat is however worrying is that despite the repayments being made by the miner, the debt pile continues to grow.

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As at the end of June 30, 2015, HCC’s current liabilities exceeded assets by $148 million, which is a $63 million growth from $85 million in the same period a year ago.

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It also represents a $26 million jump in the first six months of the year as liabilities were measured at $122 million in December.
\nLast year, Hwange paid more than $25 million towards retiring legacy debts.
\nThe payment alone is 48 percent of the $37 million loss that was recorded last year.

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Attempts to close the gap between assets and liabilities are made even more difficult by the “delayed realisation of capitalisation projects “.
\nNotwithstanding significant investments in new equipment and the coming in of a new contract miner, Mota Engil, sales revenues in the interim period fell to $35,4 million from $39,9 million, while the operating loss rose to $19,5 million from $7,6 million.

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In the financial year ended December 31, 2014, HCC warned that legacy debts could have the adverse effect of affecting turnaround efforts.
\n“The impact of the legacy debts on current cash flows continued to inflict pain on the operations of the Company and torpedoed the turnaround initiatives. During the year under review, a total of US$25 million was paid towards liquidation of legacy debts whose balance has come down to US$136 million. This is in addition to $35 million which was applied to legacy debts in 2013. A review of the legacy debts established delinquent conduct on the part of the parties involved and in due course, the company will take appropriate action,” said the coal producer in a statement accompanying its year-end results.

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It is therefore unsurprising that Hwange’s net loss widened by 98 percent to $15,6 million in the six-month period to June 30, 2015 from $7,8 million in the comparative period a year earlier.

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Finance costs, which show interest payment on loans, rose to $1,1 million in the review period from 1 million.
\nAs part of measures to wriggle itself out of the debt trap, HCC intends to persuade Government to convert its debt, particularly the $60 million owed to Zimra, into equity.
\nAlready, Government holds a 38 percent stake in Hwange.

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If the deal sails through, it will mean that the taxpayers will pick up the tab.

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RioZim chases a mirage
\nHCC’s peer RioZim, a consortium of local businessmen, has also been similarly affected.
\nIn a tight economic environment where revenue continues to decline, Rio Zim had to pay more than $4,7 million in interest repayments for its loans, which is 65 percent of the resource company’s net loss of $7 million that was reported in the six months to June 30, 2014.

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For the past three years, RioZim has been grappling with debt.
\nIn 2012, the company defaulted on its debt repayment to banks.
\nAt the time, it owed banks and suppliers more than $60 million.

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It seems the cost of funds, which ranged from between 10 percent and 126 percent – averaging about 50 percent – ultimately condemned the miner into a debt trap.
\nBy the end of June this year, RioZim’s liabilities stood at $50,8 million.

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“A debt restructuring exercise is being pursued which may see the Group’s debt restructured from short term to long term at a lower cost. Over the past few years the Group’s fortunes have been overshadowed by bank debt which due to high interest costs, has remained stagnant regardless ofm significant payments,” said RioZim’s board chairman Mr Lovemore Chihota in a statement accompanying its interim financials.
\nTypically, the debt overhang has eclipsed the performance of the group’s gold units Renco Mine and the recently re-opened Cam & Motor Mine.

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Production at Renco, for example, rose 24 percent to 366 kilogrammes (kgs), while Cam & Motor weighed in with 102 kgs of gold since April 2015.

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However, Empresss Nickel Refinery remained mothballed as the company’s sole supplier was unable to supply matte during the review period resulting in a trading loss of $2,1 million.

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Murowa Diamond Mine, in which RioZim holds a 22 percent stake, has been shut for the past nine months.
\nIt is expected to be operational by the fourth quarter of the year.
\nRio Tinto International, the world’s second largest miner, which held 88 percent in Murowa, this year divested from the company.

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RioZim is however optimistic that the recapitalisation of Cam & Motor and the restructuring of its obligations will help drive the business.
\nAlso, the roping in of a Chinese company to supply a plant that is capable of processing more than 250 000 tonnes of gold ore per day will help lift production to 120 kgs of the yellow metal per month from the current 50 kgs per month.

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In the first six months of the year, the group’s revenues slumped 41 percent to $23,1 million from $39,4 million a year ago.
\nBut even after the huge finance costs, the loss narrowed to $7 million from $7,4 million in the same period in 2014.

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Debt becomes too sour for sugar producer
\nSugar refiner Starafrica corporation, which controls three mains subsidiaries: Gold Star Sugars Harare; Blue Star, a logistics business; and Country Choice Foods, is also reeling under a $60 million debt.
\nSince 2013 efforts have been made to relieve the company’s unfavourable company position through a Scheme of Arrangement that was entered to with creditors on August 7, 2013.

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The scheme envisaged the restructure of the firm’s debt and balance sheet, including the disposal of Bluestar Logistics and a 33 percent stake Tongaat Hulett Bostwana (THB).
\nIt also gave Starafrica a moratorium on debt repayments for a six-month period leading to February 7, 2015.

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It is believed that the disposals of the stake in THB and Bluestar logistics have been difficult because of their valuations.The company’s board chairman, Mr Joe Mutizwa, said last week there were plans to convert the debt into equity and courting a strategic partner for the business.
\nUnsurprisingly, the bulk of Starafrica’s creditors are financial institutions such as IDBZ Bank, Kingdom Bank, Stanbic Bank Zambia, DuPont Agricole De Portugal, Afreximbank, Intermarket Zambia and pension fund the National Social Security Authority.

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Though the group narrowed losses to $7,2 million in the full year ended March 30, 2015, it has never reported a profitable position for the past six years.

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Companies look up to RBZ
\nIn the Monetary Policy Statement published on August 5, 2015, the Reserve Bank of Zimbabwe (RBZ) made several interventions that were meant to provide succor to companies that were suffering from high interest rates and stubborn debt.
\nIn addition to capping interest rates at 18 percent for high risk borrowers, the RBZ through Zimbabwe Asset Management Corporation (Zamco) – a special purpose vehicle established to acquire non-performing loans from banks – has also committed to buying debts for distressed companies from banks with a view of restructuring them.

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By the end of last week, the bank was expected to have acquired $58 million from four distressed companies that have been judged to be potentially viable.

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To date, Lobels Bread is one notable example of a company that successfully emerged from the clutches of a huge debt mountain.
\nThe breadmaker owed $15 million to banks such as CBZ, NMB and FBC by 2012.
\nHowever, the debt was converted into equity.

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The banks only exited after Lobels had found a new investor in Takura Capital earlier this year.
\nEconomist Mr Brains Muchemwa, who is also managing director Oxlink Capital, said last week corporate gearing levels, which describe the company’s debt level to its share capital, had reached tipping point, adding that in an environment that is deflationary, the real cost of debt continues to increase.

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“The current corporate gearing levels have reached tipping point as most of the highly indebted corporates are not generating adequate net cashflows to service, let alone extinguish their obligations.

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“The situation is compounded further by the deflationary environment that has seen revenues plateauing yet penalty interest rates for those in default in excess of 20 percent per annum. This has left most of the big corporates in vicious debt traps and with no let up on the tight liquidity conditions in the near future, bankruptcy is the most inevitable routes,” said Mr Muchemwa.