RAINBOW Tourism Group (RTG) shareholders on Thursday approved the group’s US$4, 5 million rights offer to recapitalise the company.
The group will issue 225 million shares for subscription at a price of US$0,02 per share at a ratio of 13,6737 shares for every 100 ordinary shares held.
Addressing an Annual General Meeting (AGM), Chairman Joseph Kanyekanye said the recapitalisation initiatives will improve the working capital position of the hotel group as well as reduce the impact of finance costs on the income statement.
Analysts say failure to implement the rights offer would have made it impossible for the company to retire short-term debt and would continue to be burdened by high finance charges.
"The rights issue funds which the group intends to raise will be used to fully retire the short term borrowings left over following the US$10 million medium term loan, which was availed by National Social Security Authority (NSSA)," he said.
The group’s short term borrowings stood at US$12, 6 million as at June 30, 2012.
Kanyekanye said the group had been able to diagnose and establish its weaknesses, and would henceforth adopt a culture anchored in profitability and service delivery.
“We discovered internal control weaknesses particularly in procurement, which resulted in separations of the group and those involved,” he said, adding that RTG had re-introduced internal tender processes.
Kanyekanye added that the board will now have an “enlarged” involvement in all capital projects and will not use short-term debt for any such ventures.
NSSA would underwrite the rights offer which will cost US$252 000 and is expected to take up unsubscribed shares, or shares not renounced in favour of another party to the rights offer.
“In the absence of recapitalisation post-dollarisation of the economy, RTG management had to resort to expensive short-term loans borrowed from local banks to finance critical capital requirements and working capital,” RTG said in a circular to shareholders.
“The proposed recapitalisation through a rights offer of approximately $4, 5 million is designed to address the group’s working capital requirements by retiring part of the $12, 6 million short-term
expensive loans and the balance shall be restructured through a $10 million secured from a local lender under favourable borrowing terms.”
As at June 30, RTG’s borrowings amounted to US$23, 9 million with the PTA bank and Afrexibank owed a combined $11, 3 million. Local institutions were owed US$12, 6 million.
“The directors are of the opinion that RTG is now in a constrained position in as far as servicing its debt is concerned.
However, upon successful implementation of this rights offer, the company shall be in a better position to service its financial obligations as and when they fall due,” the circular read in part.
“In the event that the proposed rights offer is not implemented; the company’s earnings will be subdued as a result of working capital constraints and relations with creditors will further deteriorate which may result in possible litigation.”