By Stuart Theobald

The albatross around banking group Absa's neck - Pinnacle Point - is not going away any time soon.

The unaudited results revealed a loss of R64-m. During the period, the group managed to sell only R9-m worth of property as against R80-m a year earlier.

That was largely due to the economic environment The leisure property development group might cost Absa even more than the R1-billion-plus it has put in so far.

Absa owns almost 40% of Pinnacle Point after it inadvertently inherited 21% of the business in late 2008 when single-stock futures traders defaulted on payments.

In an effort to wring some value out of the business, the bank has since pumped another R125-million into the group. It is now in a dispute over a further R95-million.

On New Year's Eve, Pinnacle announced its interim results for the six months to end-August, scraping in before a JSE deadline to suspend trade in the group's shares.

The unaudited results revealed a loss of R64-million. During the period, the group managed to sell only R9-million-worth of property as against R80-million a year earlier.

That was largely due to the economic environment - demand for leisure properties, such as the golf course developments Pinnacle specialises in, fell through the floor because of the recession and because of tougher bank lending.

There was also R35-million in one-off costs related to restructuring and a secondary listing in Nigeria during the period.

The announcement also revealed a standoff with Absa, which is disputing the validity of one of Pinnacle's key assets - a 400ha piece of land in Lagos, Nigeria, that it plans to develop into a golf and marina complex.

The problem is that Absa is not sure that Pinnacle really owns it.

Pinnacle has been unable to produce any title deeds to the property, and has not produced required environmental impact assessments.

Absa has given Pinnacle until the end of January to cough up the required documentation.

Nigeria's notorious bureaucracy may be to blame for Pinnacle's inability to produce the documents, but an Absa source said the bank has been asking for evidence for six months.

"We're losing confidence that you [Pinnacle] are who you say you are," said the source.

Recently appointed Pinnacle Point chief executive Hennie Pretorius has been to Nigeria, but was outside cellphone range when Business Times tried to reach him this week.

A Pinnacle Point spokesman, who did not want to be named, told Business Times that "[management] are all up in Nigeria now just trying to get those things asked for by Absa sorted out."

He put the disagreement with Absa down to a misunderstanding.

"There was a misunderstanding in terms of ... what was required. That's why Absa has agreed to give Pinnacle up until the end of the month to satisfy those requests.

"They [management] are quite confident that they will make some headway up there."

Absa's attitude has no doubt been reinforced by the fact that Pinnacle's capital-raising exercise has been a failure.

Pinnacle initially wanted to raise R360-million as advised by international investment bank Rothschild.

Part of that was done by converting the loans Absa had made to the company - R125-million-worth - into shares at 15c a share.

This resulted in Absa acquiring about 18% more of the equity in the company than the 21% it already owned.

Another lender, Lagos-based Goldbanc Management Associated (previously known as Goldman Asset Management, but not to be confused with investment bank Goldman Sachs) also converted R34-million-worth of debt.

The rest of the R360-million was to come from existing shareholders who were to subscribe for shares.

Absa stepped in to underwrite that capital raising on condition that Pinnacle raised at least R100-million from new shareholders.

That was done rather neatly - a single investor, Cape Town-based Trilinear Asset Managers, stumped up the R100-million itself.

That left R95-million in equity that Pinnacle wanted to raise from the existing shareholders.

Absa's underwriting of the offer meant that it had to make good any shortfall.

In the event, shareholders were less than enthusiastic about the offer, which allowed them to subscribe for shares at 15c each.

Only R1.2-million in subscriptions were received. The share price has since fallen to 8c, so those who did not subscribe will not be regretting their decision.

Absa is now reluctant to take up the balance of the R95-million itself, fearing it would be throwing good money after bad.

The underwriting exercise was agreed to under previous management at Absa Capital. New Absa Capital CEO Stephen van Coller has taken a much harder line on the Pinnacle issue - as has new group chief executive Maria Ramos.

At the time of Absa's last financial results, the bank wrote off the value of the 21% it then owned, costing it almost R1-billion.

It will probably have to write off the further R125-million-worth it has now acquired.

Pinnacle is threatening legal action to force Absa to follow through on the underwriting, but has promised to find the required Nigerian documentation by the end of January.

For Absa, the headache is not over yet. The viability of the Pinnacle Point business now looks to be uncertain.

The New Year's Eve results showed that Pinnacle did not impair the value of the properties it carries on its balance sheet.

The group claims to be fully solvent, but that's due to the R1.2-billion value it places on properties in its portfolio - a value it has not reduced, despite the far tougher property market.

Any impairment to that value would have damaged the company's earnings further.

Against those assets it is also carrying hefty debt of R579-million. For year-end results, auditors will have to test the valuation assumptions behind that property portfolio.

Unless there is a rapid recovery in the leisure property market, more pain will be coming for the group.

Source: Business Times

Publisher: I-Net Bridge
Source: I-Net Bridge