Embattled cement producer PPC is finalising a R3-billion to R4-billion capital raising plan in parallel with urgent efforts to bed down a R2-billion bridging guarantee facility to settle outstanding obligations to bondholders that come due on June 23.

The JSE-listed group is facing serious liquidity problems following a recent downgrade by S&P Global Ratings, which triggered an early redemption of R1.75-billion, plus interest, to noteholders.

The company was blindsided by a clause in a 2013 Domestic Medium Term Note Programme memorandum, stipulating early redemption should its long-term rating falling below investment grade.

The clause was triggered on May 30 when the company’s long- and short-term South African national scale corporate credit ratings were downgraded to zaBB-/zaB from zaA/zaA-2 respectively.

CEO Darryll Castle indicated to Engineering News Online that the company had been unaware of the clause and “how and why” it had been acceded to. However, he said the immediate focus was on shoring up the group’s liquidity rather than tracking down those responsible.

“I guess it wasn’t properly logged and recorded at the time that the company accepted the risk and, therefore, it lost visibility. What we will have to do when the dust settles is look at how this came about and who signed off . . . [but] it’s really not for now.”

Castle stressed, too, that PPC was fully aware, from 2015, that it would need to raise further capital and had considered announcing a capital raising programme in September last year. It held back, however, in an effort to improve its planning processes.

Ironically, as part of that process, it procured the services of the commercial unit of S&P to develop a “mock rating”, owing to the fact the the rating would be critical to determining the value of the capital-raising initiative. The information garnered was subsequently used by S&P Global Ratings to trigger an “event-driven review” and the downgrade to junk.

Besides the R2-billion bridging guarantee facility, PPC has indicated that it plans to raise between R3-billion and R4-billion through a rights issue. Had it not been for the downgrade, the rights issue would probably have been below the R3-billion level.

The company has mandated a syndicate of banks comprising Standard Bank, Nedbank, Absa and Rand Merchant Bank, to finalise the capital raise and Castle expects the income from the rights issue to flow by mid-September.

“Once that is fully underwritten, we would have de-risked the company completely,” he explained, adding that at least R3-billion in debt would be paid down immediately, leaving the company “lightly geared” in a market that could be bottoming.

PPC has initiated conversations with some of its largest shareholders and it is also currently considering options for the form that the capital raising will take. It is also investigating prospects for having it underwritten by shareholders, banks or “outside parties”.

“I’m reasonably confident that we will get the support that we require,” Castle said, arguing that, besides the balance sheet stresses, the company was “fundamentally operating very well”, despite difficult market conditions.

Cement sales in the six months to March 31 fell by 1%, while revenue fell by the same level to R4.5-billion.

Profit for the period was up 25% year-on-year to R351-million, a rise attributed to the group’s profit improvement programme, as well  as the sale of some noncore assets. Castle did not see much further scope for noncore disposals, however.