When a company such as Trustco wishes to expand, it needs to engage in capital raising in order to fund the expansion. Generally, this is done via either debt (like traditional loans) or equity (selling ownership of a business) in order to access capital. During the last week, Trustco concluded its own capital raising programme that combined these two aspects to great effect.
During 2018, Trustco’s Huso transaction was finalized when a mining license was granted to its Kunene diamond mine (NNDC) and the purchase price was paid via an issue of new shares to Trustco’s majority shareholder, Dr Quinton van Rooyen. In capital raise terms, this was an equity transaction – Trustco paid for the mine via selling its ownership to Dr van Rooyen. However, equity transactions has an unfortunate side-effect for other shareholders – namely that their ownership is diluted, or in other words, reduced.
Trustco needed to raise fund for a variety of projects going forward to maintain growth momentum, and thus sought funding. Primarily, this involves the development of the Meya Mine in Sierra Leone in order to allow it to go into full production, as the exploration results had revealed it was a resource of at least 3 million carats – or in order words, having a value of at least USD 1 billion at the current prevailing diamond prices.
But Trustco was not only looking towards expanding its resources segment. Its banking and finance segment required financing as well – not only for the Trustco Finance loan book, but also to capitalize the burgeoning Trustco Bank, to enable it to provide mortgage bonds, SME loans, personal loans and commercial loans. The insurance segment was also looking to identify opportunities in the market, and of course, given Namibia’s credit downgrade, the group was also exploring restructuring its existing debt obligations.
The precarious position of Namibia’s economy meant that Trustco could not feasibly raise debt capital in the current market conditions, but using equity to raise this capital would incur further dilution in the holdings of the group’s existing shareholders. A new, innovative approach was required to enable Trustco to pursue these opportunities.
This approach was to raise debt capital, but not from traditional funder – but rather from Trustco’s majority shareholder, Dr van Rooyen. In this way, no additional shareholder dilution would occur. Dr van Rooyen would then raise this debt capital by using the additional equity he was issued, thereby ensuring that no change of control occurred, and basically converting part of his equity in Trustco into debt. Dr van Rooyen retained an option to convert this debt back into equity in future at a higher share price should he not wish to retain this debt, albeit at a high share price.
During January this year, this plan was put to a shareholder vote, where Dr van Rooyen was not allowed to vote, and it was approved by 99.9% of minority shareholders. Minority shareholder were quite enthused that this transaction would not only provide capital, but also increase the share’s free float, enhancing liquidity in the share as well as widening its shareholder base.
During February, the capital raise began in earnest. A portion of the shares were disbursed on the open market, but private placements were contracted to place all of the NAD 1 billion worth of shares that had been pledged to this capital raise programme. By the end of March, however, the capital raise of NAD 1 billion was oversubscribed, and a total of NAD 1.269 billion was raised.
As a result, Trustco was not only able to capitalize ass of its business segments for long-term growth, but was able to do so without diluting existing shareholder, or acquiring debt from new international funders. The outcome of this capital raising exercise resulted in a textbook example of how any company can raise the bar for funding and maintain its drive towards growth, no matter the economic situation.