Retailer Spar garnered significant attention yesterday as it released its interim financial results, revealing that it had violated its debt agreements with banks.
This breach occurred due to the depreciation of the South African rand and the conversion of foreign debt into the local currency for reporting purposes.
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However, Spar announced that its lenders had decided to overlook the breached covenants and had demonstrated strong support in this challenging situation.
In the period ending on March 31, 2023, the company reported a 30.2% decrease in diluted headline earnings per share, amounting to 447.7 cents.
This decline was attributed to reduced sales in South Africa and Switzerland.
However, Spar group’s turnover experienced a 7.9% increase, reaching R72.9 billion.
Spar acknowledged on March 31, 2023, that there had been a breach of the group’s leverage covenant .
This breach was a result of the depreciation of the rand and the conversion of foreign debt into the reporting currency (ZAR).
Additionally, lower-than-expected profitability due to uncontrollable cost increases, coupled with lower-than-expected turnover growth, contributed to the breach.
During the retailer’s results presentation, Mike Bosman, Spar’s executive chairman, stated that based on the company’s projections and forecasts, it would continue to face constraints until September unless there was a significant turnaround in working capital.
“We have presented our proposal to the Irish banks, and some European bankers have already expressed their support for it.
In fact, we have received support beyond September 2023.
However, as a formality, we will approach all of the banks again in September and request their support once more,” he explained.
Bosman emphasized that it is important for everyone to understand that they hold a majority of their debt from overseas sources, and this debt is cost-effective.
According to Spar, their net debt for covenant purposes amounted to R12.8 billion.
As of September 30, 2022, their net debt stood at R9.8 billion.
“The increase in net debt of R3 billion between the end of the year and the interim period-end is primarily due to the net overdraft position in South Africa, which increased by R1.7 billion.
This increase is mainly attributed to the working capital cash-flow impact caused by SAP go-live challenges at the KwaZulu-Natal distribution center, as well as the financial support provided to SPAR Poland,” the company stated.
The rise in net debt also reflects an increase in foreign-denominated borrowings of R1.3 billion due to the foreign exchange impact resulting from the conversion of foreign-denominated borrowings into the reporting currency.
Furthermore, it is a consequence of increased foreign debt used to finance capital expenditure in Switzerland and acquisitions in Ireland.
“Spar group’s net debt includes borrowings amounting to R8.5 billion (2022: R7.6 billion). Most of the borrowings are denominated in foreign currency, with 60.4% in Euros and 37.8% in Swiss francs, all in ZAR terms,” the company clarified.
In addition to its debt struggles, the struggling retailer is also grappling with the absence of a leader and has been losing market share to competitors like Pick n Pay and Shoprite.
Bosman stated that the retailer will provide an update on the appointment of a new CEO for South Africa Spar in approximately one month.
He emphasized that Spar wants to take its time and not rush the appointment process.
Former CEO Brett Botten, 57, announced his retirement in January after nearly two years in the position.
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Botten’s retirement occurred amidst allegations made by independent retailers who use the Spar brand, accusing the company of engaging in “fictitious” and “fraudulent” loans, as well as displaying racial bias.
At the time, the company did not provide a specific reason for Botten’s retirement.
