The Nova Property Group believes the Companies and Intellectual Property Commission’s (CIPC’s) latest compliance notice, which bans the Sharemax rescue vehicle from selling any more properties, is flawed and will take it on review.
In a comprehensive media statement released on 15 August 2022, the group said it would abide by its terms pending the outcome of the review process. “We have consulted our legal team, and they are in the process of drafting papers to review the latest compliance notice. We accept that the latest compliance notice is, pending its review, binding, and we will abide by its terms.”
The compliance notice was issued in July, after it became apparent that Nova had sold another investment property, and after it had failed to repay the former Sharemax investors within the ten-year period prescribed in the Section 311 Schemes of Arrangement (SoA). (Nova’s board believes it has the authority to postpone repayments beyond this period, a view not shared by the CIPC or Nova’s former auditor. See below)
Moneyweb’s calculations reveal that since 2011, Nova has sold 19 of the 28 unencumbered investment properties it inherited from Sharemax. Since 2017 alone, Nova has sold ten shopping centres for around R360 million, of which only R110 million was returned to investors.
This may have been necessitated by a steady deterioration of Nova’s financial position over the past few years, and it experiencing significant cash flow problems.
Nova’s auditors warned against its solvency as far back as 2017.
The auditors also expressed concerns that the company was using the proceeds of the sale of properties to fund operational expenses rather than to return it to debenture holders.
Sale of properties
Nova says in the August statement that the sale of the properties was to the benefit of debenture holders.
It said the properties were sold when their potential to generate income deteriorated to such an extent that the proceeds could be used more productively by upgrading and developing other properties in the portfolio.
This was done to increase the value of these properties to give the debenture holders a better outcome than if the properties were retained.
“Nova is satisfied that it has managed to unlock optimal value over the past 12 years, for nearly every class of debenture holder debt linked to the above disposed of properties, by having strategically redeployed the proceeds and allowed for capital growth to bridge the gap between an inherited ‘bad property’ and being able to pay relevant debenture holders enhanced percentages, up to 100%, of their historical investment, in instances where the property was disposed of for far less.”
Nova says it followed this approach as the group faced various challenges, “limiting its ability to access external funding. These challenges include negative perceptions stemming from its link to the failed Sharemax scheme and “unjust, negative and even incorrect media reporting”.
This, according to Nova, resulted in the group being unable to source external funding. One example is that a funding line of R200 million was withdrawn due to “continued incorrect and negative Moneyweb reportage”.
This resulted “in many funding lines, equity partnerships, including a proposed listing of Nova in 2019, all key to value enhancement and resultant debenture payments, not coming to fruition. As an example, Nova had, on more than one occasion, secured funding lines in excess of R200 million only for such to be withdrawn” due to the adverse reporting.
Furthermore, the group states that the debenture repayment will depend on whether Nova can obtain external funding.
Nova claims that despite struggling to access funding, it managed to grow its asset base from R2.2 billion in 2011 to R2.7 billion in 2021.
It adds that a “cursory reading” of its annual financial statements (AFS) indicates that it has the assets to repay debenture holders but that the repayment of debentures “is unfortunately taking longer than initially planned and projected.”
It also stated that it had repaid debentures at 100c in the rand. (According to Moneyweb calculations, Nova has repaid R176 million.)
However, Nova fails to mention that its most recent AFS received an adverse audit opinion for its financial year to the end of February 2021. Such an audit opinion means the auditors did not believe the financial statements were a fair reflection of the company’s financial position.
The auditors also believed the valuations for several properties were overstated.
(Nova needs to publish its financial statements for the year to the end of February before the end of this month, which would reveal the company’s current financial status.)
‘Investors have not lost everything’
Nova also stated that “contrary to continued incorrect and malicious reportage by Moneyweb”, debenture holders have not “lost everything.”
Nova says it is in the process of developing undeveloped land. “Funding is currently being sourced, post which, sales teams will be engaged to market these projects. Simultaneously, successful tenders will be finalised to contract with various construction and development teams,” the statement reads.
Nova does not state that it inherited the undeveloped land from Sharemax back in 2011 and that it has not been developed subsequently.
Nova also refers to several ‘misunderstandings’ in the statement.
It says the company had the discretion to postpone the repayment of debenture holders beyond the ten years set out in the SoA. “The 10-year period was a projected period based on circumstances prevailing at the time of the structuring of the SoA. Payment of debentures may be made at any time, depending on circumstances, in order to achieve payment to the best extent possible.”
Nova also notes that it does not have to repay the total R4.6 billion the 18 600 investors put into Sharemax, but rather the amounts “equating to the fair market value of relevant properties”. These amounts are much lower.
Nova also said it was not set up solely for repaying debenture holders but would continue to trade after the debenture was settled.
Nova also included information reflecting its calculations of the aggregate capital growth value enhancement for all classes of debentures between 2012 to 2020.
Nova also included a table in the press statement reflecting its calculations of the capital growth achieved related to the debentures linked to the properties that were sold.
Nova’s explanation of the table:
- Many of the disposed of properties have achieved full payment of the historically invested funds to their relevant Debenture Holders. (Green Blocks in Table)
- Optimal value, through the redeployment of the proceeds of the disposed of properties, has already been achieved, eventuating in the capability of future payment of the full historically invested funds. (Grey Blocks in Table)
- Optimal value enhancement still in process. 86% of the targeted optimal value creation for full payment to these relevant Debenture Classes achieved to date. (White Blocks in Table)
Nova’s conclusion in the press statement was:
“The Nova Board is committed to continuing building on the positives achieved over the past decade. Nova is confident that it has done everything in its power, to securing for its debenture holders and stakeholders the best possible value creation.
“Nova is looking forward to completing the historic restructuring process, with maximum benefit to its debenture holders and stakeholders.”