IDC’s precarious finances a challenge for post-Covid economic recovery 

Minister of Trade, Industry and Competition Ebrahim Patel said in his foreword of the Industrial Development Corporation’s (IDC) latest annual report that “going forward, the IDC will have a significant role to play in the economic recovery post Covid-19…

“The opportunities that will arise from the implementation of the African Continental Free Trade [Area] Agreement (AfCFTA) will need purposive partnerships with the private sector and a focus on manufacturing.”

However, an analysis of the information published in its annual report for its financial period to the end of March 2020, suggests the company may not necessarily be financially sound.

This is due to the expected credit losses on loans and advances, the poor performance of subsidiaries and the negative fair value adjustment on equity instruments.

Operational performance

The IDC suffered an operational loss of R3.8 billion (2019: profit of R720 million) and a comprehensive loss of R35.1 billion (2019: profit of R10.5 billion).

The comprehensive loss includes a negative fair-value adjustment on equity instruments of R40.2 billion (2019: R10.6 billion positive fair-value movement on equity instruments).

The corporation has not provided a breakdown of the negative fair-value adjustment, which includes investments in listed and unlisted equities, as well as preference shares. Its major holdings include Sasol (probably the main culprit for the R40.2 billion write down), Kumba Iron Ore, BHP, South32, ArcelorMittal SA and Sappi.

Subsidiaries include poorly performing phosphate and phosphoric acid producer Foskor, which recorded a loss of R1.6 billion. The IDC is looking for a strategic partner to invest in Foskor.

Tshepo Ramodibe, head of corporate affairs at the IDC, said this process is already underway.

Balance sheet

The health of the balance sheet also took a turn for the worse as total assets dropped from R144.6 billion in 2019 to R109.6 billion.

The main reason was a drop in the value of listed equities, which plunged from R54.9 billion to R23.1 billion, mostly due to Sasol.

Post balance sheet as at 28 September, the directors’ report stated the value of the portfolio of listed shares increased by R17 billion to R40.5 billion.

The main driver was the growth in Kumba’s share price, attributed to higher iron ore prices, as well as the recovery in the Sasol share price.

Borrowings

According to the financial statements, the IDC has borrowings of R41.2 billion, of which R11.1 billion will be maturing in the 2020- 21 financial year.

This would require a strong cash flow to repay, as well as to service the debt.

The obligation to repay R11.1 billion of borrowings in the 2020- 21 financial year places the IDC in a very precarious position, and may limit its ability to fully fulfil its financing responsibilities to stimulate economic growth.

Says Ramodibe: “Maturities during the current financial year amount to R6.2 billion.

“The amount of R11.1 billion includes R3.9 billion which IDC manages on behalf of third parties, which is not repayable, but is being disbursed in line with the criteria of the specific funds.

“Furthermore, as a result of the IDC’s ratings downgrade and its reduced debt/equity ratio as at March 2020, certain borrowings became repayable in line with covenants agreed with the lenders.

“IDC, however, received waivers for the covenant breaches and therefore an amount of R1 billion disclosed as repayable during the current year, will only be repayable in future years.”