Sanlam Limited (SLM) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sanlam Investor Update on the development of the BEE SPV. [Operator Instructions] Kindly note that this event is being recorded. I will now hand the conference over to the Chief Executive Officer, Mr. Paul Hanratty. Please go ahead, sir.

Chris, thank you very much. And good afternoon, ladies and gentlemen, and thank you for joining us on this call this afternoon. I know that it's a very short notice. I'm joined on the call by our Group Finance Director, Abigail Mukhuba; our Chief Risk Officer and Chief Actuary, Lotz Mahlangeni; and the Head of Investor Relations, Grant Davids. Earlier today, we announced the acquisition of the senior ranking preference shares and the BEE structure through which Sanlam in 2019 issued 5% of Sanlam's ordinary share capital to a special purpose vehicle. The SPV shareholders consists of a broad-based group of [ empowerment ] beneficiaries and our anchor empowerment shareholder, Ubuntu-Botho. I'd like to just provide some context and background to this transaction. When Sanlam purchased the remaining stake in Saham in 2018 and you'll recall that this is the business that now forms the bulk of Sanlam's operations in Africa that are subsequently being put into the Allianz JV. Sanlam funded this acquisition partly through the issue of new shares in a BEE structure intended to increase the black ownership of Sanlam in a broad-based manner. The structure that was involved was very typical of a leverage structure [ that funded ] by Standard Bank and Sanlam, partly through the issue by the SPV of pref shares. The structure success is, of course, dependent on the dividends paid by Sanlam and share price appreciation in order to create value over time for the beneficiaries of the SPV. Unfortunately, the pandemic and subsequent market dislocations have meant that the share price appreciation required has not taken place. And for this reason, the mark-to-market loss on the structure has resulted in significant impairments on Sanlam's preference share funding over time. These impairments have already been recognized in Sanlam's Group equity value as the value of Sanlam's funding to the SPV is tested for impairment at each reporting period. The SPV itself has had a negative equity value since the market dislocations brought about as a result of the onset of the pandemic in March 2020. As a result of this persistent negative equity value, the trust was incorporated, beneficiary classes identified, but no beneficiaries could or were nominated for the trust to date. Our intention was that we would only finalize the nomination of these beneficiaries once there was a reasonable expectation of benefits accruing. The SPV debt to Standard Bank is repayable in March 2024. And in order to repay the debt, the SPV will need to sell the Sanlam shares that it holds as security against this debt. In this event, there will be a large overhang of Sanlam shares in early 2024 in the market. Sanlam has assessed the SPV and concluded that there's a significant risk but the value of the SPV may still be negative in March 2024. We estimate that the Sanlam share price would need to reach [ ZAR 85 ] for the SPV to reach a [ normal ] value by March 2024. The reason why this breakeven value is higher than the original issued price is the cumulative effect of finance costs exceeding the dividends received by the SPV to date. The cost of finance for the SPV has risen over the period as a result of increase in the prime overdraft rate. We do remain hopeful that this -- the BEE SPV can be maintained as to the Sanlam share price will recover sufficiently by March 2024 to make this possible. However, we are cognizant of the risks that the share price does not recover sufficiently over the next 7 months and wish to create flexibility in dealing with SPV in March 2024. The risk of having to sell the Sanlam shares with active securities of the Standard Bank loan to the SPV remains significant. A subsidiary of Sanlam is therefore acquiring from Standard Bank, the senior ranking preference shares issued by the SPV to Standard Bank. The 85 million Sanlam shares backing these preference shares will remain as a security for this debt. In March 2024, depending on the prevailing Sanlam share price, Sanlam will consider the future of the BEE SPV. Should the Sanlam share price remain below the breakeven levels, the BEE SPV will probably be wound up. The SPV will be able to redeem all the debt through the sale of the 85 million shares to Sanlam itself and the subsequent cancellation of these shares by Sanlam can take place. The action of acquiring the senior debt in the SPV with a view to closing the SPV, if necessary, eliminates the risk of Sanlam shares being sold into the market to repay all the debt of the SPV. At the same time, it creates the option for Sanlam to reduce the number of shares in issue should the SPV have to be wound up. Should it become necessary to close the SPV in March 2024, this will result in a deterioration in the black ownership credentials of Sanlam. But I want to stress that Sanlam remains firmly committed to transformation and our empowerment credentials will remain outstanding even after the potential closure of this SPV vehicle. As a result, the group does not anticipate doing any further transactions at the group level around BEE. It is important to note that Sanlam will remain a Level 1 BEE contributor and a leader in the industry even should the BEE SPV close in March 2024. The Ubuntu-Botho remains an anchor shareholder in Sanlam and a strong partner in driving our strategy to build a fortress position in South Africa and is fully aligned with all of the actions that we are taking. I hope that, that has provided a little bit of context for the SENS announcement that you would have seen earlier today. And I'm now going to open up to questions. If you could just indicate if you have a question, and then between, Grant, Abigail, myself and Lotz, we will endeavor to answer your questions. Thanks very much.

[Operator Instructions] Our first question is from Sarine Barnard of Ninety One.

I just wanted to ask, so the other funding by Standard Bank that you call the collar funding, that also have security of 26 million Sanlam shares, what happens to that? [indiscernible].

Lovely to hear from you. And first, let me say I'm very happy for 2 -- well, 3 reasons. One is nice to hear from you. But 2, you've beaten Michael Christelis, but maybe that's because he's not on the call.

I think he's on leave.

He's on leave but it still goes -- gets talked up as a win for you. And then thirdly, I'm delighted because I said to Grant -- Grant always prepares a very extensive list of Q&As, and he didn't have this question on. I said Grant, that's the first question people are going to ask. So let me explain to you that in respect of it's ZAR 1.1-odd billion of a press structure from Standard Bank, there is a collar structure around it. And the 26 million shares will -- if -- when we come to the end of -- when we get to March 2024, those shares -- those 26 million shares will be given to Standard Bank, but they are very unlikely to be sold in the market because in creating the collar structure, Standard Bank will have borrowed the shares from somebody, and will be merely returning those shares to the party or parties that they have borrowed them from in putting the structure together. So they are going to be treated differently to the 85 million and don't pose the same risk to us in terms of overhang in the market. I hope I've explained it clearly enough.

Do you have any other further questions, Sarine?

No, that's fine.

[Operator Instructions] So we have no further questions in the queue. Would you like to make some closing comments?

Chris, thank you very much once again for hosting us, and thank you to everybody who took the time and trouble to dial in. And I hope that our communication has been clear enough. I know that the SENS itself is quite detailed but doesn't necessarily provide a very good overall picture. So thank you very much. And if there are any further questions that may arise now that you go through it, please, the first contact, get hold of Grant, Head of Investor Relations, and he will be very happy to answer your questions. But thank you very much and wishing you all the very best.

Thank you very much, sir. Ladies and gentlemen, that then concludes today's event, and you may now disconnect your lines.