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TSL to Convert Chemco Debt

February 20, 2014

TSL Limited has proposed to convert US$2,6 million worth of debt and trade payables in Chemco into equity if shareholders' back the suggestion at a meeting early next month.

At the extraordinary general meeting scheduled for March 13 2014, Chemco shareholders will be requested to endorse an increase in the firm's authorised share capital, issuing of Chemco shares to TSL, waive shareholders' pre-emptive rights and give directors authority to effect the transaction.

The transaction was necessitated by challenges arising from the US$2,4 million debt that Chemco borrowed over a three year period from parent company, TSL, and financial institutions to support its operational and financial costs.

TSL is a 62,92 percent shareholder in Chemco Holdings, which has 100 percent interest in Chemco Development and a controlling 67,48 percent shareholding in Agricura Limited.

The debt comprises US$2 million owed to TSL and US$327 000 borrowed from banks, but because of poor operational and financial constraints, it cannot settle the obligations.

Chemco has struggled to meet its financial obligations due to structural changes in demand from key markets, high overheads and inability to effectively recapitalise the company.

This resulted in the company generating revenues and cash flows insufficient to support operational and financial costs.

As such, TSL has proposed a transaction that will result in the conversion of the shareholders' loan, the bank over draft and trade payable to be assumed by TSL, into shares.

According the circular to shareholders, TSL extended the loan to Chemco at 8 percent per annum and further met various other obligations on behalf of its troubled subsidiary. The US$2,6 million worth of debt and trade payables will be converted into Chemco shares to be issued to TSL at us$0,17 per share resulting in issuance of 15 536 588 new shares.

The Chemco shares will be issued to TSL through a private placement while existing Chemco shareholders will get one TSL share for every 1,88 Chemco share already held. After conversion of the shareholder loan into equity, TSL will assume Chemco's US$327 000 bank overdraft and US$330 679 worth of third party trade payables its subsidiary owes.

"TSL has business interests other than its holding in Chemco and is a guarantor to the bank overdraft. TSL believes that it is better placed to service these debts, leaving Chemco free to use its cash flows and revenues for other corporate purposes and removing the related security on Chemco's property assets," Chemco said in the circular.

In order to facilitate the debt and trade payables conversion into equity, Chemco will have to increase its ordinary share capital from 20 000 ordinary shares to 31 000 ordinary shares with a nominal value of US$0,01 each.

The offer price of US$0,17 per share represents a 112 percent premium to Chemco's net asset value per share of US$0,08. As at October 31, 2013 TSL's NAV per share and market share price stood at US$0,19 and US$0,38 per share.

The transaction will dilute minority shareholders' interest in the agri-chemical manufacturer by 49,51 percent resulting in TSL increasing its controlling stake in the firm to 81,64 percent. The rationale behind transaction was due to shortcomings in Chemco's current business model that, coupled with high overheads and inability to recapitalise operations, have resulted in the firm posting financial losses in the last three years.

Other reasons behind TSL's offer to Chemco shareholders was limited retail and institutional investor interest in Chemco shares due to lack of liquidity and small market value.

"Consequently, the company's share price has suffered falling from 365 day high of US$0,300 to a low of US$0,005 before the suspension of trading on the Zimbabwe Stock Exchange," Chemco said in a circular to shareholders.

Further, Chemco contends that based on its market capitalisation the compliance and cost requirements of the ZSE have become too "onerous", prompting the need to delist.

The transaction is subject to approval from Chemco shareholders, ZSE, the Reserve Bank and other regulators.

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Source: AllAfrica

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