MADISON Group accounts are in red, according to an explanatory statement dated September 30, 2019.
An audit conducted by KPMG Zambia indicates that the shareholder, Madison Financial Services Plc, has shown commitment and played a significant role in the recapitalisation of the business operations of Madison Asset Management Company Limited (MAMCO).
“While the company’s balance sheet is under severe strain at the moment, it is the Board’s view that maintaining the company as a going concern would be in the best interest of all the stakeholders and hence the need for agreement on a scheme of arrangement with its Creditors,” stated MAMCO chief executive officer Mercedes Mwansa.
“MAMCO still has a viable business that can help contribute to the economic development of the country in general and the financial sector in particular and the measures introduced by the Board, together with the restructuring of the balance sheet, will see the company make a much-needed turnaround and continue to grow.”
MAMCO is a wholly owned subsidiary of Madison Financial Services PLC.
The company is regulated by the Securities and Exchange Commission of Zambia (SEC), the Pensions and Insurance Authority (PIA) and is also a member of the Lusaka Stock Exchange (LuSE). At the Fixed Date, the company had an authorised share capital of ZMW500,000 divided into 500,000 shares of ZMW 1.00 which are issued and fully paid-up.
According to the Explanatory Statement, MAMCO “has so far received a cash injection amounting to ZMW 16,100,000.00 (sixteen million, one hundred thousand kwacha) and is waiting to receive a further cash injection amounting to ZMW 60,000,000.00. This amount is due to be remitted by June 30, 2020.
“Although turnover has shown growth in the past years, the company has experienced a great number of challenges since 2017 which has led to major financial losses. MAMCO reported an operating loss of ZMW 40,500,000 (forty million five hundred thousand Kwacha) for the year ending 2017 and ZMW 26,500,000 (twenty-six million five hundred thousand Kwacha) for the year ending December 2018,” the report reads in part.
“As at the reporting date, the company had a mismatch between current assets and current liabilities of ZMW 35,100,000 (thirty-five million one hundred thousand Kwacha). The adverse performance of the company has been driven primarily by exposure to a non-performing counterparty which in turn has deteriorated the performance of the company’s Fixed Income Fund. The company also has an imbalance in its exposure to non-performing property.”
Furthermore, a directive was issued on December 10, 2018 by the SEC on Prohibited Activities by Capital Market Operators.
“This directive banned all capital market operators from receiving placements and deposits directly from the market. In order to comply with this directive MAMCO is required to wind down the Fixed Income Fund (FIF) or alternatively adhere to SEC directives that require funds received from the public to be directly invested in shares or bonds on behalf of the clients or invested in Collective Investment Schemes,” the report reads. “At inception of the FIF, the Company profited from interest rate differentials of around 500 basis points above borrowed funds. This was largely driven by growth in non-deposit taking financial institutions and tier two (2) banks appetite for demand deposits. However, over the years, the margins reduced due to competition from commercial banks and non-deposit taking financial institutions that acquired deposit taking licenses, thus doing away with the intermediary role played by MAMCO. The degradation of the capital position has rendered the company in a position that is in breach of regulatory compliance requirements (minimum net capital and minimum net liquid margin).”
It used short term borrowed and placement funds to finance property developments during the commercial real estate boom.
“The oversupply of properties resulted in delayed sales which has subsequently created an asset/liability mismatch,” the report stated.
“Default Risk – The fixed income asset class is inherently exposed to default risk. This risk was initially mitigated through diversification of the FIF portfolio. However, the diminishing margins resulted into higher concentration in non-banking financial institutions which were increasingly exposed to default risk.”
But the board said liquidation was not in the interest of all stakeholders.
“Due to the following factors, the company has experienced challenges since 2017 which have led to losses: (a) the general economic environment was affected as a result of elections that have a tendency to slow down the economy due to the uncertainty they created; (b) increased interest rates; (c) Stiff competition from deposit-taking microfinance companies offering higher yields on the market reducing margins on the FIF; (d) Slowdown in the economy affecting the housing sales and reducing the yield on assets and therefore the cost of borrowing significantly higher than the return earned on the assets; (e) Illiquid property portfolio that cannot be easily disposed making it difficult to take opportunities on the market from the higher attractive rates; (f) fluctuating exchange rates that affected the cost of borrowing; and (g) The Securities and Exchange Commission (SEC) has deemed the product illegal hence the urgent need to unwind the fund. However, the fund had significant asset- liability mismatch that requires to be wound down over a period of time,” the report reads. “Realising the seriousness of the financial position of the Company and the risk of liquidation, the Shareholders and the Board have considered a number of options in the last twelve months and decided that liquidation was not in the best interest of all the stakeholders because the reasons that led to the company being in this position could be addressed by restructuring the operations of the company. In that respect, they have taken the following steps: The Board has engaged the Shareholders of Madison Financial Services Plc to assist in the recapitalisation of the business of the Company. The company has received ZMW 16,100,000.00 and a further ZMW 60,000,000.00 is set to be remitted by 30th June 2020. A number of assets amounting to ZMW 143,774,524.00 and attributable to the FIF have been earmarked for disposal. The company is also making all efforts to ensure it remains a going concern. By initiating the Scheme of Arrangements, this process will ensure that all the assets are distributed fairly and in a way that maximises the return to all the Creditors equitably. The company has taken cost rationalisation measures, including closure of the town office and relocation of the Kitwe branch office to a cheaper location. Staff restructuring has also been done to reduce the staff numbers. The company has put on hold all budgeted capital expenditure items…Despite the cash flow challenges, the Company and its management have worked hard to transform the business and Company, into a well-known brand in the Zambian financial sector.”