Anglo American PLC, the majority shareholder in DeBeers, has announced the successful completion of its bond buyback programme. The buyback programme was mooted in February following decisions by three leading credit rating firms to downgrade the company from investment grade to junk decision.
Standard & Poor’s, Fitch Ratings agency and Moody’s Investor service both downgraded the mining giant to junk status on the backdrop of plunging commodity prices that saw the company posting annual losses of $5 billion as announced on 16th February 2015. With the company now being associated with junk status, its issued bonds became risky hence costly for the company. The latest buyback by Anglo fits in the company’s latest strategy to cut down its net debt and consolidate its balance sheet.
The buyback programme consists of Euro, Sterling and US dollar denominated maturities from December 2016 to September 2018. The mining group had to fork out $1.7 billion of cash to retire $1.83 billion of contractual repayment obligations, resulting in an immediate reduction in net debt of $130 million.
“Although the bond buy-back was funded from cash reserves, Anglo American has maintained its conservative levels of liquidity ($14.8 billion at 31 December 2015) by entering into a $1.5 billion Club Facility with three international banks. This facility has a 2-year maturity, closely matching the weighted average maturity of the bonds targeted and is broadly on the same terms as Anglo American’s existing core $5 billion Revolving Credit Facility, with no financial covenant,” read part of the press release.
The total net debt benefit of the buy-back programme amounts to $190 million by September 2018 ($130 million realised upfront through the discounts achieved on the notes and settlement of derivatives and an additional $60 million over two years through interest savings before fees and expenses).
"The bond buybacks will benefit Anglo American by $190 million in total. We will continue to actively manage our debt profile as we progress with the Group's portfolio restructuring," added, René Médori , the Anglo American Finance Director.
In December 2015, the mining giant announced that it was engaging in an accelerated and radical structuring programme to redefine the focus of its asset portfolio to transform the Company’s competitive position and create a more resilient business to deliver sustainable shareholder returns.
In the statement, Mark Cutifani, Chief Executive of Anglo American, said: “Together with the additional material capital, cost saving and productivity measures announced today, we are setting out an accelerated and more aggressive strategic restructuring of the portfolio to focus it around our ‘Priority 1’ assets, being those assets that are best placed to deliver free cash flow through the cycle and that constitute the core long term value proposition of Anglo American. While we have continued to deliver our business restructuring and performance objectives across the board, the severity of commodity price deterioration requires bolder action. We will set out the detail of the future portfolio in February, with the aim of delivering a resilient Anglo American and a step change in the transformation of the Company”.
The radical portfolio restructuring programme includes the mining giant selling off $3 billion to $4 billion of assets; the intention is to reduce number of assets by approximately 60 percent.
The reduction in number of assets will see the mining company freeing cash flow to focus on its chosen three businesses: World class core portfolio of assets in diamonds, Platinum Group Metals (PGMs) and copper.
Furthermore, Anglo American seeks to reduce its debt from $13 billion to less than $10 billion as it seeks to assure investors and credit ratings that it will stand the current challenges brought about by the plunging commodity prices that came as a result of China’s waning demand for raw materials.
Anglo American’s decision to buy back its bonds is intended to send a strong message that the company has the financial power as well as proactive capital management necessary to support the company’s debt maturity profile.
The $190 million net debt benefit is most likely to win over investors sentiments, adding on the good news that Anglo American has been receiving and releasing. In January, the mining behemoth announced that the value of rough diamond sales (Global Sightholder Sales and Auction Sales) for De Beers’ first sales cycle of 2016 improved significantly to $540 million, compared with the $248 million value of the final sales cycle of 2015. In March they followed again with more good news as rough diamond sales during the second cycle of the year continued their positive trend to $610 million.
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Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”