Various businesses that owe the Development of Bank of Namibia (DBN) and have been struggling to repay their debts have now an option to exchange some of their debt for equity to the bank for a certain period.
However, this only applies to those businesses that show positive prospects and the probability of reviving and improving their profitability.
The temporary debt-to-equity convention initiative which is called the Development Bank Business Rescue Programme was launched last week by the state-owned financier.
The bank’s chief executive officer Martin Inkumbi, who announced the rescue the programme, indicated that it will be rolled out to qualifying businesses financed by the bank as a possible alternative to liquidation.
The scheme comes at a time when local entrepreneurs and business representatives have been begging the central bank not to allow foreclosure or repossession of their pledged/collateral assets and others by commercial banks in these uncertain times.
The DBN programme involvesan enterprise giving up ownership equivalent to the amount of the money it owes to the bank or partially for some time and allowing the bank to bring in independent business managers to give technical and management advice.
“The programme takes the form of partial conversion of debt into various types of preference shares to be held by the bank in the enterprise and the deployment of independent business managers to such entities to render technical and management advisory services,” the bank pointed out.
In support of the programme, Inkumbi explained that the combination of prevalent unfavourable economic fundamentals has left many businesses at the point where they are barely able to operate.
Many enterprises are struggling to service their loans and other debt obligations to various lenders, including DBN. However, despite the economic reality, DBN and other banks have a duty to recover their capital so that they can make further loans to other borrowers.
Inkumbi explained that DBN responsibly also “strives to strike a balance to preserve the envisaged development impact”. He said the bank gives regard to employment opportunities created, income for owners, and preservation of owners’ capital and assets that the struggling companies acquired.
He also cited these companies’ contributions to local, regional and national economies, and continued economic growth, as reasons to attempt to preserve businesses.
“The bank does everything it reasonably can to preserve businesses that it has financed and, where possible, creates a win-win situation for the borrower and the bank,” Inkumbi added.
The to-be-appointed independent business rescue advisors will assess a distressed business, then they will make recommendations if the entity has the potential to be revived through a turnabout strategy.
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.
The turnabout strategy will identify changes that need to be made to the operation of the business, its governance and capital structure.
If the capital structure (debts versus equity) is not appropriate, the bank could consider converting part of the debt to the bank into alternative patient financing instruments such as convertible preference shares.
The programme to exchange debt for preference shares gives the DBN the ability to relax its repayment requirements for a portion of the loan in anticipation that the share value will increase.This will give breathing room to distressed companies in terms of monthly payments to the loan since equity capital mostly is rewarded through dividends and increase in share value.
During the period in which the bank holds preference shares, the business will be contractually obliged to meet several milestones identified by the advisor and agreed upon between the business and DBN.
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.
DBN will not own the shares forever, but only hold preference shares in the business for a limited period.
According to the programme, the bank aims to exit and transfer full ownership and control of the business to its owners or new investors or a combination of both once the business is on its feet again.
Inkumbi assured that the owners would always have the first right to repurchase the shares or, with the agreement of DBN, to arrange for the sale of the shares to third parties.
In terms of who qualifies, Inkumbi said that not all businesses in distress would qualify or meet the criteria of the business rescue programme.
For the business to be eligible for the programme 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,” Inkumbi stressed.This is because the Bank will not convert full debt into a preference share instrument and it requires the owners to be committed and willing to make further capital investments and meet the bank halfway.
For those businesses that are distressed and do not qualify, the bank will have to begin steps to recover its loans through the normal liquidation process.
DBN NON-PERFORMING LOANS
According to DBN 2021/22 annual report, credit default risk is ranked number one among the top seven risk outlooks that face the bank.
Credit risk is the risk of loss due to the non-performance of clients in respect of any financial or other obligation.The risk includes lost principal and interest, disruption to cash flows, and increased collection costs.The loss may be complete or partial, and impact the sustainability of the bank.
According to the bank’s assessment of their clients and inflows, credit risk is deemed high.
The bank’s non-performing loan for the previous financial year as a percentage of the total loan book stood at 26%, an increase from 18% in the 2020/21 financial year.
Total assets stand at N$8,57 billion, a reduction of 10% compared to 2021 results
While loans impairment ratio which represents the loss of value in the bank asset quality stood at 18%, increasing from 11.8% in the previous financial year.
The credit risk that the bank faces emanate from the persistent pandemic pressure impacting clients’ ability to service loans and contributing to the economic decline, including significant downward pressure on revenue growth given challenging macroeconomic conditions, the bank explained..
The bank also highlighted the potential effect of sovereign rating downgrades on the macroeconomic environment and funding costs. Email: email@example.com