DBN gives defaulting businesses a way out

• By Erasmus Shalihaxwe

APART from introducing holiday payment plans during Covid-19 outbreak to help businesses that are struggling to honour their loans, the Development Bank of Namibia (DBN) has introduced another scheme called Business Rescue Program to further assist businesses facing financial difficulties to get out of the ditch.

This was revealed during a media briefing this week by the bank’s Chief Executive Officer (CEO), Martin Inkumbi who said prevailing unfavourable economic fundamentals have left many businesses at the point where they are barely able to operate, and the Bank had a duty to recover its capital so that it can make further loans to other borrowers.

However, he highlighted that the Bank also strives to strike a balance to preserve the envisaged development impact.

He said the Business Rescue Program was for qualifying businesses that had been financed by the Bank as a possible alternative to avoid liquidation.

The program takes the form of partial conversion of debt into various types of preference shares to be held by the Bank and the deployment of independent business managers to such entities to render technical and management advisory services.

”At this point, by saying that the Bank gives regards to employment opportunities created, income for owners, preservation of owners’ capital and assets, contributions to local, regional and national economies, and continued economic growth as reasons to attempt to preserve businesses. The Bank, does everything it reasonably can to preserve businesses that it has financed and, where possible, creates a win-win situation for the borrower and the Bank,” Inkumbi said.

He added that the bank would in the next few weeks appoint independent business rescue advisors through a transparent procurement process.

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“Once an advisor is appointed to carry out an assessment of a distressed business, the advisor will make recommendations on the turnabout strategy. Then the turnabout strategy will identify changes that need to be made to the operation of the business, its governance or its capital structure.

“If the capital structure is not appropriate, the Bank could consider converting part of the debt to the Bank into alternative patient financing instruments such as convertible preference shares. Preference shares will give the Bank the ability to relax its repayment requirements for a portion of the loan in anticipation of growth of value and yields on the shares. Owners, would always have the first right to repurchase the shares or, with the agreement of DBN, to arrange for the sale of the shares to third parties,” Inkumbi explained.

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He further added that during the period where the Bank holds preference shares, the business will be contractually obliged to meet a number of milestones identified by the advisor and agreed between the business and DBN, and once the business is on its feet again, DBN would exit the preference share arrangement, preferably by selling its preference shares back to the original owners. Of which the first task of the business turnaround advisor would be to ascertain if the business can be rescued. If not, the Bank will have to begin steps to recover its loans through the normal liquidation process.

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“If the business can be rescued, the advisor will make recommendations on management, capital structure and governance which the enterprise will be contractually obliged to implement. In some cases, control of the management of the business could be transferred to mutually agreed business managers with expertise to help manage the enterprise out of a loss making position. Where changes to the business’s capital structure are required, the advisor will be able to either assist with bringing equity investors on board or to recommend the conversion of DBN’s debt to preference shares,” Inkumbi said.

He explained further that through the conversion, DBN will hold preference shares in the business for a limited period only.

“The program is voluntary and our aim is always for the Bank to exit and transfer full ownership and control of the business to its owners or new investors or a combination of both.

“There will be consultation between the Bank and the distressed business owners. Where a distressed business owner is not willing to accepted terms and conditions of a rescue program, they can always opt to repay the Bank’s loan or alternatively face liquidation. The terms of reference for independent advisory services have been drawn up, and they emphasize a high degree of experience and skills. The Bank believes that some businesses fail due to poor management and lack of financial control,” he concluded.