The millstone around Nampak’s neck

Nampak’s rising debt is taking its toll on the company, forcing it to negotiate debt refinancing on better terms and trying to get more money from shareholders.

At its height in 2018, Nampak’s interest-bearing debt hit R13.3 billion. Nampak has since sold many of its assets to pay off some of its debt.

These disposals included Nampak Glass, Nampak Plastics Europe, and, more recently, the company’s crates manufacturing equipment and Tanzanian manufacturing facilities.

Disposing these assets reduced the company’s interest-bearing debt to around R8 billion.

Although Nampak reduced its debt, it was not because of its operational performance. Selling assets is not a sustainable option for managing debt.

When looking at Nampak’s interest expense on its debt, it quickly becomes clear that it has taken its toll on the company.

The rising interest rates since 2021 did not help. Nampak’s interest burden has significantly increased to a worrying R828 million.

This represents an almost three-fold increase in its interest expense since the end of 2019.

However, this is only part of the story. The true impact of Nampak’s interest burden can only be appreciated when considering its interest coverage ratio.

This ratio shows how many times a company can repay its interest expense with profits from its core operating activities.

Nampak’s interest coverage ratio has significantly deteriorated over the last decade, which raises concerns over its solvency.

The decrease resulted from increasing interest expenditure and Nampak’s inability to generate the necessary operating profits to pay its interest expenses.

The blank data points in the chart below indicate periods where Nampak couldn’t cover its interest expense with its operating profit.

These periods also had significant impairment losses affecting operating profit and are generally considered to be once-off losses. This is not positive.

Even excluding the more than R2 billion impairment loss reported in H1 2023, the company would still only be able to pay half its interest expense for the interim period.

Nampak recently announced that it has concluded negotiations with most of its lenders to refinance its debt on terms more favourable to Nampak’s current circumstances.

This would likely remove a significant interest burden from Nampak and put it in a situation where it can at least cover its debt repayments with its operating profits.

On top of this, Nampak is proposing a R1 billion rights offer asking its shareholders for additional capital that will solely be used to pay off debt.

Given Nampak’s mountain of debt, it is not in any position to invest in growth operations. It would likely take a long time before it is in a healthy financial position.

Nampak is looking to sell numerous assets during the next 18 months and said its goal is to obtain R2.6 billion, which will also be used to pay off debt.

However, asset disposals can significantly affect a company’s revenue-generating capabilities and, if not done properly, could put a company in a worse position than before.