Alternatives to Protecting your Investment in ZimbabweDownload publication
Although there have been improvements made over the past few years, Zimbabwean investment climate has recently stagnated while investors adopt a “wait and see” approach in anticipations of more robust and authoritative fiscal policies and the announcement of the budget by the new government. This has resulted in a stunt on Zimbabwe’s foreign direct investment flows. We have been approached by several potential investors (both domestic and foreign) inquiring after how to secure investments given the risks inherent. It goes without saying that there is a suitable solution to each situation, depending on the particular nature and scale of the investment.
This article seeks to highlight two particular measures that could afford lenders a modicum of security over their investments in the country – namely Notarial General Covering Bonds, and Debentures. In both instances, there is a level of investment safety by way of the security of the moveable assets of the debtor.
For every investor, the question of security over their investment is a prime consideration. Added to this, when a lender either extends a credit facility to an entity or, funds a venture; factors such as market stability and other risk factors all add to the uncertainty of whether an investor can recoup his initial investment, let alone derive profit from it.
The aim of this article is to outline an effective means of managing these concerns and subsequently reduce or even eliminate the problem. We will provide a brief synopsis of a method of security which we believe addresses the uncertainty. Detailed below is a brief outline of what the Notarial General Covering Bond and the Debentures each entail, how they can be effected, and the circumstances in which they would be the most suitable or a preferred debt instrument.
NOTARIAL GENERAL COVERING BONDS (NGCB)
This is a type of security instrument that is registered over identifiable and specified moveable property. When a lender extends credit facilities to a borrower, further security can be obtained in the form of a bond over the borrower’s movable assets.
How It Protects Your Investment:
Executing a NGCB in terms of which the borrower pledges the specific asset/assets to the lender would ensure that the creditor has some real and tangible assurance of return on value for their debt.
It is critical that a proper assessment of the borrower’s creditworthiness is undertaken prior to agreeing the facility to be extended to the borrower.
- Delivery of the movable property is not a pre-requisite. The accepted position is that if the asset is described and specified in the bond, it is deemed to have been pledged to the creditor as effectively as if it had been delivered to the Creditor.
- While the holder of a NGCB does not enjoy a real right of security in the assets, subject to the bond, there is a risk of the debtor disposing of the assets, which results in the assets becoming free of the bond.
- To ensure that the assets subject to the Bond are not disposed of by the Debtor or re-financed, the Creditor should ensure that the position in respect of the assets is checked periodically to protect the lender from unpleasant surprises in the event of default.
- A Special Notarial Bond is the most secure option as it gives effectively “first option” over any specified asset in the Bond. Because the assets are specifically identified in the Bond, they are deemed to have been effectively pledged and “delivered” to the Lender. Holders of Special Notarial Bonds also rank equally with all other creditors. Thus it affords more substantial security than a “general” bond which is registered over all moveable assets that are not readily distinguishable or identifiable.
In addition to drafting of the Notarial General Covering Bond through a reputable attorney, there is a statutory fee associated with registration of a NGCB.
This is another option for investors in circumstances where a company has a high creditworthiness ranking and wants to secure long term financing but does not wish to put up any of its assets as collateral. Where an investor has identified a company that is in a stable financial position, which is desirous of obtaining corporate debt and has issued out debentures, it is often desirable to purchase these as a form of long term investment. Debentures can be purchased through reputable and established brokers.
How It Protects Your Investment:
If the issuing company has not previously pledged any of its assets to secure previous debt,then debenture holders have “first call” on the company’s assets in the case of liquidation, and are ranked with all other creditors.
In the event that the issuing company becomes insolvent, debenture holders have recourse in that they have a legal claim to the assets of the company that are not “specifically” pledged to any other debt.
It is also a key feature of most debentures that holders are entitled to be paid interest on the bond before dividends can be paid to the shareholders of the issuing company. Additionally, the issuing company is required to pay interest to the investor regardless of whether it has made profits or not.
Comparable to other forms of debt, debentures are advantageous in that they are relatively easy to dispose of on the financial markets and thus contain significantly less risk than equities.
Debentures operate on a long term basis with a long maturity date, and this longevity in itself assists in securing the investment. Investors would be comfortable knowing that their funds are tied up in a long term project that is steadily earning interest, rather than the potentially more high risk- short term investments.
The use of debentures is not widespread in Zimbabwe. However, we have advised both borrowers and lenders in negotiating loan facilities and have found that the use of debentures is a viable and practicable means of taking and providing security.
- Debentures are issued by the company with an undertaking that on maturity, the holder thereof will get a fixed return on the loan with interest.
- Usually used for long-term loans.
- Debenture holders do not have any voting rights.
- The debenture bond is in most instances capable of being subsequently transferred from investor to investor.
- Because debentures do not encumber assets, this allows the issuing company to utilise these assets for any further financing it might require thereafter.
The costs of executing a debenture are primarily,
I) Legal costs associated with drafting of a Debenture Agreement.
II) The fees applicable to preparation of a debenture certificate by your stockbroker or commercial lawyer.
The above two are only a prime example of the various debt instruments available to the investor. Depending on the needs of the particular investor, the size and nature of the investment, as well as the preference of the investor, we are well placed to draw from experience to advise on the suitability of each option.