Blue Label Telecoms Integrated Annual Report 2019

22 Blue Label annual financial statements 2019 In determining the revised valuation, cognisance was taken into account of positive cash flow generation from: (a) A decline in forecast direct expenditure on handset, SIM costs, ongoing commissions and discounts due to lower subscriber growth. (b) A reduction in forecast payroll costs. (c) A decline in capital expenditure due to cash flow constraints and lower subscriber base forecast. (d) A decrease in cash lease payments as a result of less network towers required due to the lower forecast of the subscriber base. The impact of the transactions in progress relating to a national roaming agreement and the recapitalisation of Cell C were not in effect as at 31 May 2019 and as such have not been accounted for in the valuation at that date. Accounting for the bond notes and liquidity support On 2 August 2017, TPC purchased bond notes, issued by Cedar Cellular Investments 1 Proprietary Limited (SPV1), from Saudi Oger Limited with a capital redemption value of USD42 million and with a coupon rate of 8.625% per annum for a purchase consideration of USD18 million. TPC was entitled to assign its rights and obligations, in whole or in part, to a nominee. Accordingly, it has assigned such rights and obligations in respect of 50% of the bond notes, resulting in an effective purchase consideration of USD9 million with a capital redemption value of USD21 million. As part of the restructure of the debt into Cell C by third-party lenders, TPC will be required to provide liquidity support to Magnolia Cellular Investment 2 (RF) Proprietary Limited (SPV2), which is 100% held by 3C Telecommunications Proprietary Limited, of up to USD80 million, which liquidity support will be provided over 24 months and will be in the form of subordinated funding to SPV2. Oger Telecoms contributed USD36 million of the aforesaid USD80 million thus reducing TPC’s obligation in this regard to a maximum of USD44 million. As at 31 May 2019, the Group has contributed USD24 million to SPV2, toward the latter amount. SPV1 and SPV2 own 11.8% and 16% of the shares issued by Cell C respectively. No other assets are held by these entities, and as such the Group’s bond note and liquidity support arrangements will be settled only when the value of the Cell C shares are realised by SPV1 and SPV2. The substance of these arrangements are therefore derivatives exposing the Group to the share price of Cell C. The derivatives are initially recognised by the Group at fair value and subsequently measured at fair value through profit or loss. The fair value of the derivatives are not traded in an active market and are therefore determined by the use of a valuation technique. Management performed the valuations using a Monte Carlo simulation taking into account the expected exit event date of Cell C in the next 11 to 24 months. These calculations use a valuation of Cell C provided by a qualified independent third-party valuation specialist. By way of simulation, the model generates a large number of random paths for the value of the Cell C share price from 31 May 2018 to the expected listing date. The average payoffs across the simulated paths are then discounted at the risk-free rate to obtain the present value of the shares owned by SPV1 and SPV2. As both arrangements are USD denominated, the model accounts for the forward rate of the US dollar at the expected listing date. As at 31 May 2019, an independent third-party valuation specialist attributed a nil value to Cell C Limited. As a result, an unrealised fair value loss totalling R750 million was recognised in the current year, of which R167 million related to SPV1 and R583 million to SPV2. The derivatives are level 3 instruments in the fair value hierarchy. The fair value estimate of the Glocell loan TPC acquired a 48% share in Glocell Distribution Proprietary Limited (Glocell Distribution) on 30 June 2018 (refer to note 2.4). In terms of an agreement entered into between TPC and Glocell Proprietary Limited (Glocell), Glocell has pledged its 40% shareholding in Glocell Distribution to TPC in the event of Glocell defaulting on amounts owing of R343 million to TPC as at 31 May 2019. The right to enforce this pledge is currently not exercisable. Audit, Risk and Compliance Committee’s report continued