Rate hikes denting BEE

Johannesburg - The sharp increase in interest rates over the past 22 months has got many black investors thinking: is it the beginning of the end for their business empires? Since June 2006, Reserve Bank governor Tito Mboweni has hiked the main repo rate nine times from 7% to 11.5%, resulting in prime lending rates climbing to 15% from 10.5%.

This dramatic jump has hiked the cost of servicing debts on black economic empowerment (BEE) transactions and may force financiers and black investors to postpone planned deals until the high capital cost subsides.

"It is tough these days. Most BEE deals are financed at more than the prime rate. If you calculate, you see that at 15% prime rate, the debt will double every five years," says Mutle Mogase, a black investor and an executive chairperson of Vantage Capital.

"For these deals to remain viable, the value of the underlying investments must also double. But that is unlikely because the economy is slowing down."

He predicts: "It's going to get to a point where BEE players walk away from the deals.

"The institutions, which finance the deals, will be left stranded with these shares."

Regiments Capital executive chairperson Litha Nyhonyha says the high interest rates and weak local equity markets have put BEE in a dire situation.

"I fear the repeat of the 1998-1999 period when early BEE companies collapsed. Right now we are sitting with BEE structures that are out of the money," says Nyhonyha, who is an investor in listed firms such as Capitec Bank and telecoms group Vox Telecom.

Questionable rate hike

This time the justification of the interest rate hike by Mboweni is questionable.

"Interest rates are a blunt instrument and we are trying to use them to control things that are outside of our control."

Mboweni has been hiking the repo - the rate at which the central bank lends to commercial banks - to put out inflationary fires ignited by rising food prices and fuel costs.

An expected 100% cumulative electricity price hike over the next year is expected to pour more fuel on the inflation flames, which could trigger more interest rate increases in future.

To illustrate how Mboweni's nine interest hikes have affected BEE funding, consider the R1bn transaction funded through debt over a 10-year period.

On such a deal, black investors will have to make a R16.1m monthly repayment at the current 15% prime rate compared with R13.5m before June 2006, when the prime rate was at 10.5%.

If interest rates stay at 15% over the next 10 years, this means that black investors will pay over R1.9bn.

Had the prime remained at 10.5% the total cost of the value of the loan would have been R1.6bn. This indicates that the nine rate hikes will cost black investors an extra R300m.

While debts were mounting on the back of higher interest rates, the equity markets have not shown any mercy to black investors. Equity markets need to rise sharply to keep the investments of black investors above water.

The JSE has lost a big chunk of its market capitalisation since the US subprime crisis surfaced. In August last year, the JSE?s market capitalisation stood at R6.2 trillion, then dropped to R5.4 trillion in January this year, before recovering to the current level of around R5.8 trillion.

Tshepo Ntsimane, the chief executive of Legae Securities, says he expects the prime rate to reach 16% by October, further hampering any meaningful BEE activity.

- City Press