3. FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
3.2 Financial risk management
  In the course of its business, the Group is exposed to a number of financial risks, namely credit risk, liquidity risk and market risk (including interest rate and foreign currency risks). This note presents the Group's objectives, policies and processes for managing its financial risk and capital.
  Risk management is monitored and managed by key personnel of each entity in the Group on a daily basis, based on their specific operational requirements.
3.2.1 Credit risk
 
Credit risk, or the risk of financial loss to the Group due to customers or counterparties not meeting their contractual obligations, is managed through the application of credit approvals, limits and monitoring procedures. The Group is exposed to credit risk on financial assets mainly in respect of those assets detailed in the financial instruments table above. The carrying amounts of financial assets represent the maximum credit exposure.
Expected credit losses        
The Group tracks significant increases in credit risk using information available to the Group regarding the counterparty credit risk. Furthermore, this is supplemented by taking into account the performance of the counterparty to the financial asset in question, as well as data from Moody's Analytics where applicable.
The Group calculates its allowance for credit losses for financial assets measured at amortised cost using expected credit losses (ECLs).
ECLs were determined by the Group based on an unbiased, probability weighted amount that is determined by evaluating a range of possible outcomes and, where relevant, reflecting the time value of money. In accordance with the requirements of IFRS 9, ECL allowances are required to be measured in a way that incorporates information available at the reporting date about past events, current conditions and forecasts of future economic conditions. Each of these were used in calculating the ECL on the in-scope financial assets of the Group. Moody's Analytics is used to incorporate forward looking information in the determination of ECLs. Moody's consider the effect of various macro-economic phenomena and events such as Covid-19 to be embedded in the underlying actual results of entities, and as a result reflected in the probability of default (PD) assumption of underlying ECL methodologies. As such, no significant overlays or other adjustments, other than the macro-economic forecasts, have been included in the current and prior financial year.
Moody's Analytics produces a set of macro-economic forecasts for South Africa that considers the historical accuracy of various forecasters to identify reliable sources. These are incorporated into their GCorr macro-economic forecast set. Based on research conducted by Moody's Analytics, it recommends the use of its Baseline, Stronger Near-Term Rebound (S1), and Moderate Recession (S3) forecast sets weighted 40%, 30% and 30% (2022: 40%, 30%, 30%) respectively for a forward looking adjustment for the purposes of IFRS 9. It considers both public and private South African company defaults in this research. The methodology considers the industry of the asset and the related volatility in comparison to the average volatility in the South African economy.
Significant increases in credit risk can be evaluated with reference to movements in the balances between the grouping categories used throughout this note.
Management defines default as the situation when counterparties fail to make payments in a timely manner and future payments are either suspended or unlikely.
For counterparties where no external credit ratings are available, the Group has used a management-determined credit risk rating model. The management of the Group performs a rigorous internal rating assessment process of all external counterparty credit risk exposures and rates these exposures grouping them into the below five groups which are then aligned to equivalent Moody's sourced default ratings.
The groupings, as referenced throughout this note, are generally aligned to the staging requirements of IFRS 9 as follows:
  • Group 1 financial assets are typically Stage 1.
  • Group 2 financial assets are typically Stage 1, with minor Stage 2 balances.
  • Group 3 financial assets are typically Stage 1 and Stage 2 balances.
  • Group 4 financial assets are typically Stage 3.
  • Group 5 (POCI) financial assets are typically Stage 3.
The table below discloses the credit quality of the financial assets carried at amortised cost (excluding advances to customers and trade receivables) of the Group:
  2023
R'000
2022
R'000
Group 1 1 428 338 2 769 084
Group 2 10 573 23 989
Group 3 10 373 60 835
Group 4 1 741
Group 5 2 110 982
Total 3 562 007 2 853 908
The movement in ECLs:
  2023
R'000
2022
R’000
Provision for impairment    
Balance at the beginning of the year 265 723 331 772
Allowances made during the year 735 099 261 475
Amounts utilised (287 999) (327 524)
At 31 May 712 823 265 723
(i) Cash and cash equivalents
The Group places cash and cash equivalents with major banking groups and quality institutions that have high credit ratings. The Group has the majority of its credit risk with Investec Bank Limited in line with its treasury function. Investec Bank Limited has a credit rating of Ba2 based on the latest Moody's local currency long-term issuer default ratings.
The table below discloses the credit quality of the financial assets (excluding trade receivables) of the Group for which external credit ratings are available. External credit ratings were based on the latest Moody's default ratings. The counterparties were categorised as follows:
Group 1: Financial institutions with a Moody's long-term debt issuer rating of Ba2 or better, or cash on hand. Insignificant ECL.
  2023
R'000
2022
R'000
Counterparties with external credit rating
Group 1
1 302 770 2 723 591
Total 1 302 770 2 723 591
(ii) Loans to associates and joint ventures
The Group has provided loans to associates and joint ventures of the Group as part of specific transactions, to satisfy operational as well as other requirements. These associates and joint ventures are located in South Africa. The Group manages credit risk on this portfolio of loans by following strict protocols for the approval thereof, and where possible obtaining appropriate security and other collateral. Management regularly reviews these loans and uses an internal ratings-based system to track credit risk thereon. Refer to note 2.1.2.
Critical accounting judgements and assumptions
Funding provided to Cell C – originated credit-impaired
The Group believed that at the time of providing the funding to Cell C, as part of the September 2022 Recapitalisation Transaction, such funding was considered to be credit impaired in line with IFRS 9 with reference to Appendix A. Cell C was restructured and refinanced with the purpose of deleveraging its balance sheet, providing it with liquidity with which to operate and grow its businesses and to position itself to achieve long-term success for the benefit of its customers, employees, creditors, shareholders and its other stakeholders. Cell C utilised the TPC Debt Funding to settle the claims of secured lenders by paying an amount of 20c to the rand. The face value of the funding provided by TPC is 2.75 times the cash it advanced. This deep discount evidences incurred losses. Although Cell C's financial plan reflects that the Group's funding will be repaid in full, there is execution risk related to the achievement of the business plan.
Accordingly, all funding provided to Cell C (including significant modifications of existing funding – refer to note 2.1.2 relating to the "Deferred repayment terms of an amount of R1.1 billion owing by Cell C to CEC") in relation to the September 2022 Recapitalisation Transaction are classified as originated credit-impaired financial assets.
The table below discloses the credit quality of the loans to associates and joint ventures of the Group for which no external credit ratings are available. Equivalent credit ratings were based on the latest Moody's default ratings. These ratings include forward looking adjustments for all relevant economic factors. Management defines default as when counterparties fail to make payments and future payments are either suspended or unlikely. Management writes off loans where they have actively pursued the debt and there is no indication of recovery.
Group 1: Fully performing counterparties with a credit rating equivalent to a Moody's rating of B1 or higher. ECL range up to 9.57% (2022: up to 7.63%).
Group 2: Fully performing counterparties with a credit rating equivalent to a Moody's rating of between B1 and B2. ECL range of 9.57% to 11.66% (2022: 7.63% to 9.26%).
Group 3: Fully performing counterparties with a credit rating equivalent to a Moody's rating of between B2 and Ca. ECL range of 11.66% to 53.39% (2022: 9.26% to 54.0%).
Group 4: Counterparties who are considered to be in default and have an equivalent Moody's rating of Ca or lower. ECL of 53.39% to 100% (2022: 54.0% to 100%).
Group 5: Counterparties which have been designated as credit impaired or originated credit impaired loans. ECL based on the credit rating of the underlying counterparty.
  Gross
carrying
amount
R'000
Loss (allowance)/
reversal
R'000
Net
carrying amount
R'000
Average
ECL/
impairment
ratio
%
31 May 2023        
Loans advanced to counterparties without external ratings included in:        
Group 1 41 001 (1 251) 39 750 (3.05)
Group 3 4 884 (569) 4 315 (11.65)
Group 4 2 338 (2 338) (100.00)
Group 5 2 166 241 (55 259) 2 110 982 (3.00)
  2 214 464 (59 417) 2 155 047  
31 May 2022
Loans advanced to counterparties without external ratings included in:
       
Group 1 41 776 (432) 41 344 (1.03)
Group 3 8 000 (741) 7 259 (9.26)
  49 776 (1 173) 48 603  
The loss allowances as at 31 May 2023 for loans to Cell C, which are included in group 5 above, are determined as follows:
2023 Basis of
loss allowance
Gross
carrying amount
before modification
R’000
Loss on modification of financial asset at initial recognition
R’000
Loss (allowance)/
reversal
R’000
Net
carrying amount
R’000
Deferral Loan Lifetime ECL (originated
credit impaired)
970 562 (64 500) 6 876 912 938
Debt Funding Lifetime ECL (originated
credit impaired)
1 123 204 (59 991) 1 063 213
Reinvestment Instrument Lifetime ECL (originated
credit impaired)
136 975 (2 144) 134 831
    2 230 741 (64 500) (55 259) 2 110 982
(iii) Loans receivable
The Group has provided loans to third parties who are seen as product distributors, in order to expand its distribution channels. These loans have been extended on various terms depending on management's assessment of the business rationale for the provision thereof. The Group manages credit risk by following strict protocols for the approval and monitoring of these loans, and where possible, obtaining appropriate security and other collateral. Management regularly reviews these loans and uses an internal ratings-based system to track credit risk thereon.
The table below discloses the credit quality of the loans receivable of the Group for which no external credit ratings are available. Equivalent credit ratings were based on the latest Moody's default ratings. These ratings include forward looking adjustments for all relevant economic factors. Management defines default as when counterparties miss payments and future payments are either suspended or unlikely. Management writes off loans where they have actively pursued the debt and there is no indication of recovery.
Group 1: Fully performing counterparties with a credit rating equivalent to a Moody's rating of B1 or higher. ECL range up to 9.57% (2022: up to 7.63%).
Group 2: Fully performing counterparties with a credit rating equivalent to a Moody's rating of between B1 and B2. ECL range of 9.57% to 11.66% (2022: 7.63% to 9.26%).
Group 3: Fully performing counterparties with a credit rating equivalent to a Moody's rating of between B2 and Ca. ECL range of 11.66% to 53.39% (2022: 9.26% to 54.0%).
Group 4: Counterparties who are considered to be in default and have an equivalent Moody's rating of Ca or lower. ECL of 53.39% to 100% (2022: 54.0% to 100%).
Group 5: Counterparties which have been designated as credit impaired or originated credit impaired loans. ECL based on the credit rating of the underlying counterparty.
The loss allowance as at 31 May 2023 for loans receivable is determined as follows:
  Gross
R'000
Loss (allowance)/ reversal
R'000
Net
carrying amount
R'000
Average
ECL/
impairment
ratio
%
31 May 2023        
Loans advanced to counterparties without external ratings included in:        
Group 1 93 647 (7 829) 85 818 (8.36)
Group 2 11 692 (1 119) 10 573 (9.57)
Group 3 7 139 (1 081) 6 058 (15.14)
Group 4 8 671 (6 930) 1 741 (79.92)
  121 149 (16 959) 104 190  
31 May 2022
Loans advanced to counterparties without external ratings included in:
       
Group 1 4 242 (93) 4 149 (2.19)
Group 2 25 894 (1 905) 23 989 (7.36)
Group 3 60 818 (7 242) 53 576 (11.91)
Group 4 4 984 (4 984) (100.00)
  95 938 (14 224) 81 714  

(iv) Advances to customers
Advances to customers represent the activities of the Group's subsidiary, CEC, which provides financing for cellular handsets. This customer base is widely dispersed throughout South Africa and no significant concentrations of credit risk have been noted.
The business model of these financing arrangements exposes the Group to the credit risk of the population of the underlying subscribers who are all customers of Cell C Service Provider Proprietary Limited and other business partners of CEC.
Management has put in place credit risk policies as well as stringent customer acceptance policies and limits to manage the credit risk exposure at deal initiation. Subsequent to deal initiation, credit risk at a subscriber level is managed through a combination of policies and procedures which limit the customers' ability to incur further debt should their accounts not be up to date.
The Group calculates an ECL for the instruments in this portfolio in accordance with the general approach in IFRS 9 using a provision matrix model (refer to detail under (v) Trade and other receivables) which takes into account, among others: roll rates; past performance, incorporated through staging, default and curing definitions; and applicable forward looking indicators in line with Group policy. The Group continually refines and improves the model applied to take into account new information and additional data that becomes available as internal processes evolve. These improvements are accounted for prospectively as changes to the ECL estimate when they arise.
The loss allowance as at 31 May 2023 for advances to customers is determined as follows:
  Gross
R'000
Loss (allowance)/
reversal
R'000
Net
carrying amount
R'000
Average
ECL/
impairment
ratio
%
31 May 2023        
Advances to customers without external ratings:        
Collateralised handset financing receivables*
Handset financing and subscription income sharing receivables        
Fully performing 2 031 224 (55 097) 1 976 127 (2.71)
Past due by 1 to 30 days 116 118 (24 598) 91 520 (21.18)
Past due by 31 to 60 days 48 833 (18 801) 30 032 (38.50)
Past due by more than 60 days 643 006 (483 483) 159 523 (75.19)
  2 839 181 (581 979) 2 257 202  
31 May 2022
Advances to customers without external ratings:
Collateralised handset financing receivables*
67 355 (782) 66 573 (1.16)
Handset financing and subscription income sharing receivables        
Fully performing 1 415 881 (50 476) 1 365 405 (3.56)
Past due by 1 to 30 days 112 748 (34 181) 78 567 (30.32)
Past due by 31 to 60 days 50 325 (19 375) 30 950 (38.50)
Past due by more than 60 days 270 685 (144 642) 126 043 (53.44)
  1 916 994 (249 456) 1 667 538  
* Handset financing receivables related to previous commercial arrangement with Cell C.
Once the recoverability of these receivables comes into question, the amount is handed over to external debt collectors and if not recovered within the time frame detailed in our Collection Policy, is written off.
(v) Trade and other receivables
The Group has a diversified customer base and policies are in place to ensure sales are made to customers with an appropriate credit history and payment history. All of the Group's revenues are generated in South Africa. Individual credit limits are set for each customer and the utilisation of these credit limits is monitored regularly. Customers cannot exceed their set credit limit without specific Senior Management approval. Such approval is assessed and granted on a case by case basis. Management regularly reviews the receivables age analysis and follows up on long-outstanding receivables. The Group's customer base has been aggregated into groupings that represent, to a large degree, how the Group manages its receivables and also illustrates the spread of credit risk. Within these aggregated groupings, the Group's exposure to credit risk is made up of banks and other financial institutions, major retailers, independent and informal retail customers, petroleum forecourts, municipalities, private utilities and cellular networks. The balance of the customer base is widely dispersed.
Provision matrix (including advances to customers)
ECLs are calculated by applying a loss ratio to the aged balance of receivables at each reporting date. The loss ratio is calculated according to the ageing/payment profile of sales by applying historic/proxy write-offs to the payment profile of the sales population. In instances where there was no evidence of historical write-offs, management used a proxy write-off for similar receivables obtained from external credit rating agencies. Receivable balances have been grouped so that the ECL calculation is performed on groups of receivables with similar risk characteristics and ability to pay.
Exposures are mainly segmented by customer type, i.e. banks and other financial institutions, major retailers, independent and informal retail customers, petroleum forecourts, municipalities, private utilities and cellular networks. This is done to allow for risk differentiation. Similarly, the sales population selected to determine the ageing/payment profile of the sales is representative of the entire population and in line with future payment expectations.
The PD and LGD are then adjusted for forward looking information to determine a point-in-time adjustment. Forward looking information is also used to derive a base, upside and downside scenario given multiple forecasts under the guidance of Moody's. These assumptions are applied to determine the ECL for the portfolio of receivables at the reporting date to the extent that there is a strong correlation between the forward looking information and the ECL.
In most instances, no material adjustments were required to accommodate forward looking information, as the majority of receivables were settled within a relatively short period (under 60 days on average). Macro-economic forecasts have been included in the ECL calculation for advances to customers.
The Group used 60 to 84 months' sales data to determine the payment profile of the sales. Where the Group has information about actual historical write-offs, actual write-offs have been used to determine a historic loss ratio. Alternatively, management has used a proxy write-off, based on management's best estimate including information obtained from an external ratings agency (Moody's). The Group has considered quantitative forward looking information such as the core inflation rate. Qualitative assessments have also been performed, of which the impact was found to be immaterial.
Management considers trade receivables aged in excess of 60 days (advances to customers)/90 days (trade receivables) past due (where the excessive ageing is not caused by administrative delays that are within the control of the Group), and those handed over to the Group's attorneys for legal collection processes, to be in default and accordingly increases the allowance for impairment raised on these receivables. This policy is applied to all receivables, other than receivables for starter packs, municipalities, private utilities or specific circumstances where management has rebutted the presumption that a customer is in default when 90 days past due as a result of the inherent nature of the product/transaction being undertaken which follows a business cycle in excess thereof. Receivables for starter packs are considered to be in default where no income has been earned from activation or ongoing revenue in the last three months and the receivable has aged in excess of the anticipated repayment cycle. Receivables from municipalities and private utilities are considered to be in default where the net exposure to the counterparty after deduction of the collateral held has aged in excess of 12 months, or where handed over to the Group's attorneys for legal collection purposes.
Trade receivables are written off when there is no reasonable expectation of recovery. This is assessed individually by each operation and includes, for example, where the trade receivables have been handed over for collection and remain outstanding or the debtor has entered bankruptcy. Other receivables and other financial assets are individually assessed by management based on each situation's unique facts and circumstances and are written off when management believes that there is no reasonable expectation of recovery.
The loss allowance as at 31 May 2023 for trade receivables and other receivables to which the provision matrix has been applied is determined as follows:
Ageing and impairment analysis
  
Gross 
R'000
 
Loss 
(allowance)/ 
reversal 
R'000
 
Net 
carrying 
amount 
R'000
 
Average ECL/ 
impairment 
ratio 
%
 
31 May 2023             
Fully performing receivables             
Trade receivables arising on revenue from contracts with customers             
Banks and other financial institutions  109 931  (13) 109 918  (0.01)
Independent and informal retail customers  247 834  (466) 247 368  (0.19)
Formal market retail customers  304 899  (865) 304 034  (0.28)
Customers in the petroleum sector  80 745  (64) 80 681  (0.08)
Receivables for starter packs  39 793  (28) 39 765  (0.07)
Cell C  4 212  (10) 4 202  (0.24)
Other cellular networks  530 557  (23) 530 534  (0.00)
Municipalities and private utilities  63 335    63 335   
Trade receivables arising on financing transactions             
Cell C  248 524  (2 055) 246 469  (0.83)
Other  93 319  (369) 92 950  (0.40)
Sundry receivables  202 714  (54 468) 148 246  (26.87)
Receivables from revenue recognised on fixed term contracts  130 339    130 339   
Past due receivables             
Trade receivables arising on revenue from contracts with customers             
Banks and other financial institutions             
Past due by 1 to 30 days  203    203   
Past due by 31 to 60 days         
Past due by 61 to 90 days         
Past due by more than 90 days         
Independents and informal retail customers             
Past due by 1 to 30 days  13 692  (156) 13 536  (1.14)
Past due by 31 to 60 days  1 506  (344) 1 162  (22.84)
Past due by 61 to 90 days  2 028  (581) 1 447  (28.65)
Past due by more than 90 days  21 106  (15 141) 5 965  (71.74)
Formal market retail customers             
Past due by 1 to 30 days  4 855  (5) 4 850  (0.10)
Past due by 31 to 60 days  22    22   
Past due by 61 to 90 days  3 614    3 614   
Past due by more than 90 days  2 267  (2 267)   (100.00)
Customers in the petroleum sector             
Past due by 1 to 30 days  74  (2) 72  (2.70)
Past due by 31 to 60 days  3    3   
Past due by 61 to 90 days  353  (10) 343  (2.83)
Past due by more than 90 days  2 266  (2 266)   (100.00)
Receivables for starter packs             
Past due by 1 to 30 days  34 316  (100) 34 216  (0.29)
Past due by 31 to 60 days  208    208   
Past due by 61 to 90 days  3    3   
Past due by more than 90 days  360  (360)   (100.00)
Cell C             
Past due by 1 to 30 days  2 344  (11) 2 333  (0.47)
Past due by 31 to 60 days  6 440  (48) 6 392  (0.75)
Past due by 61 to 90 days         
Past due by more than 90 days  279  (279)   (100.00)
Other cellular networks             
Past due by 1 to 30 days  40    40   
Past due by 31 to 60 days  97    97   
Past due by 61 to 90 days  48    48   
Past due by more than 90 days  400  (400)   (100.00)
Municipalities and private utilities             
Past due by 1 to 30 days  16 113    16 113   
Past due by 31 to 60 days  25 595    25 595   
Past due by 61 to 90 days  44 475    44 475   
Past due by more than 90 days  104 832  (955) 103 877  (0.91)
   2 343 741  (81 286) 2 262 455  (3.47)
 
Gross
R’000
Loss
(allowance)/
reversal
R’000
Net
carrying
amount
R’000
Average ECL/
impairment
ratio
%
31 May 2022        
Fully performing receivables        
Trade receivables arising on revenue from contracts with customers        
Banks and other financial institutions 78 751 (9) 78 742 (0.01)
Independent and informal retail customers 526 889 (1 887) 525 002 (0.36)
Formal market retail customers 152 472 (550) 151 922 (0.36)
Customers in the petroleum sector 68 655 (20) 68 635 (0.03)
Receivables for starter packs 51 549 (72) 51 477 (0.14)
Cell C 3 782 (14) 3 768 (0.37)
Other cellular networks 65 844 (3) 65 841 (0.00)
Municipalities and private utilities 86 419 86 419
Trade receivables arising on financing transactions        
Cell C 2 557 395 (26 595) 2 530 800 (1.04)
Other 14 389 (59) 14 330 (0.41)
Sundry receivables 193 414 (870) 192 544 (0.45)
Receivables from revenue recognised on fixed term contracts 134 036 134 036
Past due receivables        
Trade receivables arising on revenue from contracts with customers        
Banks and other financial institutions        
Past due by 1 to 30 days 445 445
Past due by 31 to 60 days 13 13
Past due by 61 to 90 days
Past due by more than 90 days 5 726 (5 726) (100.00)
Independents and informal retail customers        
Past due by 1 to 30 days 75 990 (148) 75 842 (0.19)
Past due by 31 to 60 days 4 892 (133) 4 759 (2.72)
Past due by 61 to 90 days 1 553 (130) 1 423 (8.37)
Past due by more than 90 days 18 584 (18 584) (100.00)
Formal market retail customers        
Past due by 1 to 30 days 140 140
Past due by 31 to 60 days
Past due by 61 to 90 days 3 (1) 2 (33.33)
Past due by more than 90 days 5 609 (5 609) (100.00)
Customers in the petroleum sector        
Past due by 1 to 30 days 1 249 1 249
Past due by 31 to 60 days 70 70
Past due by 61 to 90 days 16 16
Past due by more than 90 days 3 548 (3 548) (100.00)
Receivables for starter packs        
Past due by 1 to 30 days 21 297 (201) 21 096 (0.94)
Past due by 31 to 60 days 1 171 (4) 1 167 (0.34)
Past due by 61 to 90 days 1 1
Past due by more than 90 days 67 (67) (100.00)
Cell C        
Past due by 1 to 30 days 2 794 (25) 2 769 (0.89)
Past due by 31 to 60 days 929 (8) 921 (0.86)
Past due by 61 to 90 days  
Past due by more than 90 days 75 (75) (100.00)
Other cellular networks        
Past due by 1 to 30 days 56 764 56 764
Past due by 31 to 60 days
Past due by 61 to 90 days
Past due by more than 90 days
Municipalities and private utilities        
Past due by 1 to 30 days 28 536 28 536
Past due by 31 to 60 days 10 656 10 656
Past due by 61 to 90 days 6 736 6 736
Past due by more than 90 days 47 070 (2 875) 44 195 (6.11)
  4 227 529 (67 213) 4 160 316 (1.59)
The movement in ECLs:
   Trade receivables 
   2023 
R'000
 
2022 
R'000 
Provision for impairment of receivables 

 


 
Balance at the beginning of the year   66 343   54 772 
Allowances made during the year  (12 518) 30 887 
Amounts utilised**  (27 007) (19 316)
At 31 May  26 818  66 343 
** Expected credit losses utilised in the write-off of long outstanding trade and loans receivable, where collection avenues were exhausted.
Credit risk sensitivity analysis
The receivables are mainly exposed to the change in the probability of default of Cell C Limited, as well as changes in the non-credit adjusted effective interest rates. The following table details the Group's sensitivity to a change in these parameters.
Financial instrument Significant unobservable parameter Potential
effect on profit/(loss)
and retained
earnings*
R’000
  Probability of default of Cell C  
Debt funding Non-credit adjusted EIR (16 613)/15 673
  Probability of default of Cell C  
Reinvestment instrument Non-credit adjusted EIR (1 669)/1 582
  Probability of default of Cell C  
Deferral loan Non-credit adjusted EIR (6 374)/6 797
* Relates to a 10% increase/decrease in the probability of default.
The effect of credit risk on hedging instruments
On 7 October 2020, TPC entered into an interest rate swap agreement in respect of its variable rate facility agreement in order to hedge its interest rate risk (refer to note 3.7 for more detail).
By using derivative financial instruments to hedge exposures to changes in interest rates, TPC also exposes itself to credit risk of the derivative counterparty, which is not offset by the hedged item. TPC minimises counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties.
At inception of each hedge, it was determined that the effects of credit risk are not expected to dominate the value changes arising from the hedging relationship as all relevant metrics to demonstrate the existence of an economic relationship have been satisfied.
At each subsequent reporting date, hedge effectiveness for each hedging relationship will be assessed and the effects of credit risk will be considered.
3.2.2 Liquidity risk
  Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due, both under normal and stressed circumstances.
  The Group's objective is to maintain prudent liquidity risk management by maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in funding by keeping committed credit lines available. Cash flow forecasting is performed in the operating entities of the Group to ensure sufficient cash to meet operational needs, while maintaining sufficient headroom to ensure that borrowing limits (where applicable) are not breached.
  Surplus cash held by the operating entities over and above the balance required for working capital management is transferred to Group treasury. Group treasury invests surplus cash in interest-bearing accounts, identifying instruments with sufficient liquidity to provide adequate headroom as determined by the above mentioned forecasts.
  Maturity of financial liabilities
  The table below analyses the undiscounted cash flows for the Group's financial liabilities into relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date.
  Payable in:
   Notes  Less than one month
or on
demand
R’000
More than
one month
but not exceeding
one year
R’000
More than
one year
but not exceeding
two years
R’000
More than
two years
but not exceeding
five years
R’000
 More than
five years
R’000
  2023            
  Airtime repurchase obligations – lenders              3.4.2 70 192 772 109 280 544
  Airtime repurchase obligations – other third parties       3.4.2 14 687 132 183
  Class A Preference Shares    3.4.2 292 621
  Other interest-bearing borrowings            3.4.2 28 323 1 681 578 1 356 170
  Non-interest-bearing borrowings  3.4.2 2 719
  Trade and other payables*    3.4.1 3 081 445 2 455 782
  Lease liabilities           3.8 848 10 983 12 104 14 217
  Financial liabilities at fair value through profit or loss        3.5 100 000 175 000
  Bank overdraft          3.3.4 3
  Total   3 198 217 5 052 635 1 748 818 481 838
  2022            
  Interest-bearing borrowings 3.4.2 14 130 2 198 187 495 308
  Non-interest-bearing borrowings 3.4.2 719
  Trade and other payables* 3.4.2 2 369 306 3 560 412
  Lease liabilities 3.8 2 676 36 306 7 096 3 210
  Derivative liability 3.5 110 000
  Other financial liabilities at fair value through profit or loss 3.5  23 282    
  Bank overdraft 3.3.4 63 11
  Total   2 386 894 5 928 198 502 404 3 210
  * Trade and other payables exclude non-financial instruments, being VAT and certain amounts included within accruals and sundry creditors.
  As part of the restructure of the debt into Cell C by third-party lenders, TPC was 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 was to be provided over 24 months 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 2021, the Group had contributed the full USD44 million to SPV2.
  Liquidity risk sensitivities
  Preference Share A and the airtime sale and repurchase obligations are mainly exposed to the change in the probability of default of Cell C Limited. The following table details the Group's sensitivity to a change in this parameter.
  Financial instrument Significant unobservable
parameter
Potential
effect on profit/(loss)
and retained
earnings*
R’000
    Probability of default of Cell C  
  Preference Share A Non-credit adjusted EIR (10 269)/9 628
    Probability of default of Cell C  
  Airtime sale and repurchase obligation – from lenders Non-credit adjusted EIR 2 152/(2 189)
    Probability of default of Cell C  
  Airtime sale and repurchase obligation – other third parties Non-credit adjusted EIR 375/(375)
  * Relates to a 10% increase/decrease in the probability of default.
  Group facilities
  The Group has access to the following facilities in order to meet its liquidity needs:
  Facility Borrower Investec
Bank
Rand
Merchant
Bank
African
Bank
Value
R’000
Interest
rate
Interest
period
Final repayment
date
  General banking
facility
The Prepaid Company
Proprietary Limited
69.6% 30.4% 500 000 Prime + 1% Monthly 30 Sep
2024
  Revolving Facility A The Prepaid Company
Proprietary Limited
100% 660 000 Prime + 1% Monthly 30 Sep
2024
  Revolving Facility B The Prepaid Company
Proprietary Limited
100% 240 000 Prime + 1% Monthly 30 Sep
2024
  African Bank Comm Equipment
Company Proprietary
Limited
100% 1 900 000 11.05%
Fixed to 30 Oct 2023
Monthly 25 Nov
2025*
            3 300 000      
  * This is a revolving credit facility with draw downs available until October 2023. Facility repayment commences in November 2023 with the final settlement date being November 2025. The facility is currently in the process of being renegotiated.
  Group facilities
  The working capital loan facilities available to TPC at year-end amounted to R1.4 billion (2022: R1.125 billion), of which R1.003 billion (2022: R942 million) had been utilised. Refer to note 3.4.2.
 
  • The general banking facility available to TPC at year-end is required to reduce by R20 million per month from October 2023 to September 2024, to R260 million. The balance of this facility as well as revolving facilities A and B are payable in September 2024.
  • The following debt covenants applied to the TPC facilities with Investec and Rand Merchant Bank:
  • – Total consolidated debt to adjusted consolidated EBITDA ratio must be less than a stipulated decreasing ratio at each measurement period, from 4.0 times at 31 May 2023 to 2.25 times at 31 August 2024; and
    – BLT's market capitalisation must exceed R3 billion.
  The Group has not been in breach in respect of these covenants.
  The Group has pledged the following securities in respect of this facility and the airtime sale and repurchase obligation from the lenders (refer to note 3.4.2):
  • A General Notarial Bond over all the moveable assets of Blue Label Distribution Proprietary Limited, limited to R950 million;
  • A General Notarial Bond over all the moveable assets of BLT, TPC and Cigicell Proprietary Limited, limited to R4.75 billion each;
  • Cession & Securitatem Debiti by certain Group companies of all of their incorporeal moveable assets and claims;
  • A counter indemnity issued by certain Group companies indemnifying the lenders against any loss that they may suffer as a result of enforcing their rights;
  • A Cession in Securitatem Debiti by certain Group companies in favour of the lenders as a result of the lenders invoking revisionary and/or principle rights which they may have against any entity guaranteeing the principle debt owed by TPC; and
  • A Subordination by Blue Label Telecoms Limited and its subsidiaries of any and all inter Group claims which each may have against the other, in favour of debt and/or obligations owed by any of them to lenders.
  CEC has a financing facility with African Bank of R1.9 billion (2022: R1.9 billion).
 
  • The utilised portion of the facility at year-end amounted to R1.9 billion (2022: R1.623 billion). Refer to note 3.4.2.
  • The Group has pledged the outstanding value of handset receivables totalling R2.1 billion as security for the utilised facility.
  In addition to these facilities, the Group has sufficient working capital resources in the form of cash, trade receivables and realisable inventory to be able to adequately meet its short-term obligations.
   
  Pledges, guarantees and sureties
  Blue Label Telecoms and TPC have issued guarantees to the value of R250 million for the African Bank facility.
  The Group has overdraft, credit card and debit order collection facilities with FNB, a division of First National Bank Limited (FNB). These facilities have been secured through Group cross-sureties issued by the Company and certain subsidiary companies. These facilities, which remain substantially unchanged from the prior year, comprised an overdraft facility of R19.85 million, credit card facility of R1.4 million and a debit order settlement facility of R11 million.
  Guarantees to the value of R689 million (2022: R2.4 billion) are issued by the Group's bankers in favour of suppliers on behalf of the Group. The Group does not have access to these funds while amounts owing to suppliers are outstanding. Further guarantees to the value of R455 million have been issued by insurers of the Group in favour of suppliers on behalf of the Group. These guarantees are collateralised by a cash deposit of R20 million held by the insurer, and restricted cash of R71.1 million held by the Group in bank accounts. BLT and TPC have issued guarantees of R104 million to suppliers on behalf of Group subsidiaries. In addition, the Group's banker has issued a R50 million guarantee to a Group supplier.
3.2.3 Market risk
  Market risk is the risk that changes in market prices (interest rate and currency risk) will affect the Group's income or the value of its holding of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.
  The Group is exposed to risks from movements in interest rates and foreign exchange rates that affect its assets, liabilities and anticipated future transactions. The Group is not exposed to significant levels of price risk.
  (i) Interest rate risk
  The Group's cash flow interest rate risk arises from loans receivable, cash and cash equivalents, and borrowings carrying interest at variable rates. The Group's financial position and financial results are not affected by fair value interest rate risk as the Group does not have any fixed interest-bearing instruments carried at fair value other than the instruments detailed in note 3.5 where the fair value risk of these instruments is detailed.
  As part of the process of managing the Group's exposure to interest rate risk, interest rate characteristics of new borrowings and the refinancing of existing borrowings are positioned according to expected movements in interest rates. In addition, interest rate swaps are used to manage the risk arising from variable interest rates (see below).
  Potential effect on profit/(loss)
and retained earnings*
Potential effect on profit/(loss)
and retained earnings*
  2023
R’000
2022
R’000
  3 836 7 086
  * Relates to a 25% (25 basis points) increase/decrease in the market interest rates.
  The interest rate sensitivity analysis is based on the following assumptions:
  • changes in market interest rates affect the interest income or expense of variable interest financial instruments; and
  • changes in market interest rates only affect profit or loss in relation to financial instruments with fixed interest rates if these are recognised at fair value.
  Interest rate risk management strategy
  TPC, a wholly owned subsidiary of the Group, has a ZAR-denominated floating rate debt instrument and is therefore exposed to variability in interest payments as a result of interest rate fluctuations. To hedge this interest rate risk, TPC took out a pay-fixed, receive-floating interest rate swap instrument. This type of hedging relationship is a cash flow hedge. Refer to note 3.7 for more details.
  The Group held the following interest rate swaps as hedging instruments in cash flow hedges of interest risk:
  Estimated change to profit or loss as a result of increase/decrease in market
interest rates
Maturity
2 – 5 years
  Nominal amount (R’000) 750 000
  Fixed interest rate 7.62%
  A reasonably possible change of 25 basis points in the interest rates at the reporting date on the interest rate swap would have increased/(decreased) equity by the following amounts:
   Estimated change to profit or loss as a result of increase/decrease in market
interest rates
 
Equity, net
of tax 
R'000
 
   25 basis points increase  13 542 
   25 basis points decrease  (12 284)
  This sensitivity analysis assumes that all other variables remain constant.
  (ii) Foreign currency risk
  The Group is exposed to foreign currency risk from transactions and translations. Transaction exposure arises because affiliated companies undertake transactions in currencies other than their functional currency. Translation exposure arises where affiliated companies have a functional currency other than rand.
  The Group manages its exposure to foreign currency risk by ensuring that the net foreign currency exposure remains within acceptable levels. Hedging instruments may be used in certain instances to reduce risks arising from foreign currency fluctuations. The Group has reduced its foreign currency exposure substantially in the current year due to its writing off certain USD denominated loans.
  In the current year, the Group incurred a foreign exchange loss of R1.7 million (2022: R1.2 million loss) mainly as a result of the Group's USD exposure.
  Foreign currency sensitivity analysis
 

The Group has used a sensitivity analysis technique that measures the estimated change to profit or loss of an instantaneous 10% strengthening or weakening in the rand against all other currencies, from the rate applicable at 31 May 2023, for each class of financial instrument with all other variables remaining constant. This analysis is for illustrative purposes only, as in practice, market rates rarely change in isolation.

Increase/(decrease) in profit or loss

  Net exposure to foreign currencies
denominated: functional currency
Net assets/ (liabilities) denominated in foreign currency
R’000
 Change in exchange
rate
%
 Weakening
in functional
currency
R’000
 Strengthening in functional
currency
R’000
  2023
USD:ZAR
 (15 274)  10*  1 527  (1 527)
  * These percentages have been determined based on the average market volatility in exchange rates in the previous 12 months.
3.2.4 Capital adequacy risk
  The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
  In order to maintain or adjust this capital structure, the Company may issue new shares, adjust the amount of dividends paid to shareholders, return capital to shareholders or sell assets to reduce debt. The Group defines capital as capital and reserves and non-current borrowings. The Group is required to maintain a market capitalisation of R3 billion in terms of its covenants with Investec Bank in respect of TPC's working capital facility.