JCI to redeem R405m debenture

[miningmx.com] — Good news, incredible news…actually unbelievable.

The listed JCI debentures, currently suspended, JSE code JCDD will receive the December interest payment of 6.6c per debenture and the debenture will be redeemed at the option of the holder on January 15 2006 at 125c each.

Apparently JCI has sufficient cash or access to resources to meet this total commitment of R405m.

At the end of July this year the debenture were still trading at 88c each on the JSE. The flat return for the six months to January 2006 – for the brave at heart who were prepared to venture some money on this controversial debenture – will be 50%, or 100% on an annual basis.

This was one of the nicest investment opportunities, simply because one could calculate the potential return well in advance. The annual interest rate at prime, payable every six months, and the redemption at 125c on January 15 2006 was always known and part of the conditions of the debenture.

The risk, of course, was always whether the oft cash strapped JCI would ever be able to meet the repayment condition in January.

Over the four year lifespan of the debentures the company – largely seen as an executive toy of the father/son combination of Roger (chairperson) and the late Brett Kebble (CEO) – never missed a payment.

Frankly JCI was the Kebble’s entity. The risk attached to an investment in JSE was not the massive gold reserves of South Deep. It was the Kebbles, who in the past always met their commitments.

But a strange twist of events changed the outcome.

It started with the suspension of the listing of the shares and debentures of JCI on the JSE on July 29 2005 for not submitting financial statement on time. At that time, the ordinary shares were trading an all time low of 15c but the debentures were still at a respectable price of 89c.

Late submission of financial statement is not a serious crime but the very low price of 15c for the ordinary shares were screaming “cash flow problems”.

On August 30 an announcement by Investec bank confirmed the cash flow problems and announced a R460m cash injection into the company on condition that Brett relinquished the job as CEO (although he stayed on as a non-executive director).

Shareholders were starting to breath a little more comfortably – but there was still no clarity on the option of cash redemption of the debentures in January. It is well know that bankers seldom save a company to the benefit of existing minority debenture and shareholders.

One month later on September 30 Brett Kebble was murdered, and no arrest has yet been made. Investec put out a statement indicating that the negotiations around the re-capitalisation of JCI are continuing.

During all these dramatic events the shares and debenture remained suspended. A very small and erratic over-the-counter market (OTC) was apparently conducted over the past few months but I was unable to trace this market.

So it it appears if the improbable – if not impossible – is to become reality. Debenture holders will be offered the opportunity to request cash redemption or conversion into ordinary shares if they so chose.

I have on a number of occasions recommended these debentures to investors with a high-risk profile. The potential return always varied between 30% and 50% and often translated in an annualised return of 100%. This was first truly junk bond listed on the JSE and it was fun to follow its near failures – but eventual success.

To me it was always a better instrument than having to lend money to your in-laws, and the possible return on the debentures gives a good indication of the applicable interest rate for family loans.

Trader Vic unfortunately sold his JCI debentures long ago.

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