Financial instruments at fair value through profit or loss are classified as level 3 instruments in the fair value hierarchy. Changes in level 3 instruments are as follows:

Bond 
notes 
(SPV1)
R’000
 
Liquidity 
support 
(SPV2)
R’000
 
Loans 
receivable 
R’000
 
Put 
option 
liability 
R’000
 
Derivative 
liability 
R’000
 
Surety  loan 
receivable 
R’000
 
Other 
R’000
 
Total 
R’000
 
Balance as at 1 June 2019  –  (301 716) 202 267  (158 638) –  85 003  2 472  (170 612)
Additions  –  –  –  (7 654) (77 524) –  34 500  (50 678)
Repayments  –  –  –  –  –  –  (18 877) (18 877)
Derecognition of put option liability on disposal of VAS Operations  –  –  –  214 559  –  –  –  214 559 
Fair value (loss)/gain recognised in profit or loss  –  (48 694) (66 371) (48 267) –  19 826  (7 142) (150 648)
Other movements  –  –  (9 292) –  –  –  –  (9 292)
Balance as at 31 May 2020  –  (350 410) 126 604  –  (77 524) 104 829  10 953  (185 548)
Additions  –  –  –  –  –  –  (565) (565)
Repayments  –  331 000  –  –  –  –  3 460  334 460 
Fair value gain/(loss) recognised in profit or loss  –  19 410  –  –  9 346  (21 116) 3 692  11 332 
Other movements  –  –  –  –  –  –  (9 282) (9 282)
Balance as at 31 May 2021  –  –  126 604  –  (68 178) 83 713  8 258  150 397 
Financial assets at fair value through profit or loss – included in current assets  –  –  126 604  –  –  8 371  8 822  143 797 
Financial assets at fair value through profit or loss – included in non-current assets  –  –  –  –  –  75 342  –  75 342 
Financial liabilities at fair value through profit or loss – included in current liabilities  –  –  –  –  (68 178) –  (564) (68 742)
Closing balance  –  –  126 604  –  (68 178) 83 713  8 258  150 397 
Unrealised (losses)/gains  9 346  (21 116) 3 692  (8 078)
–  –  –  –  –  –  – 

Bond notes and liquidity support

With effect from 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 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 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 has contributed the full USD44 million to SPV2.

Fair value estimate

SPV1 and SPV2 own 11.8% and 16% of the shares issued by Cell C Limited 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 is realised by SPV1 and SPV2. The substance of these arrangements is 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 derivatives are level 3 instruments in the fair value hierarchy.

The derivatives are not traded in an active market and therefore the fair value is determined by the use of a valuation technique. In previous years, the valuation was performed using a Monte Carlo simulation taking into account the value of Cell C Limited. As no value was subsequently attributed to Cell C, the recoverable value relating to SPV1 and SPV2 reduced to zero. A liability of USD20 million, in line with the liquidity support obligation to SPV2 and included in financial liabilities at “fair value through profit and loss” was payable as at 31 May 2020 and has since been settled by a payment of R331 million, reducing the liability to zero. As at 31 May 2021, no value was attributed to Cell C Limited and as a result thereof, the value of SPV1 and SPV2 remains at zero.

Loans at fair value

TPC acquired a 48% share in Glocell Distribution Proprietary Limited (Glocell Distribution) on 30 June 2018.

In terms of an agreement entered into between TPC and Glocell Proprietary Limited (Glocell) during the year ended 31 May 2019, Glocell pledged its 40% shareholding in Glocell Distribution to TPC in the event of Glocell defaulting on amounts owing to TPC. The right to enforce this pledge is currently not exercisable. This right only becomes exercisable once Glocell has settled its outstanding debt of R105.0 million (2020: R113.2 million) to Investec Bank Limited.

Glocell’s ability to repay TPC the amounts owing to it is dependent on the extent of dividends receivable from Glocell Distribution on a piecemeal basis. The contractual terms of the loan have no fixed repayment dates, and in the event that Glocell defaults on the loan, the only recourse the Group has is to the shares of Glocell Distribution held by Glocell. As such, the financial instrument has been classified and measured at fair value through profit or loss.

No fair value adjustment (2020: R75.7 million) of the R126.6 million (2020: R202 million) owing to TPC was required in the current financial year. The prior year downward adjustment was required due to unfavourable trading conditions, with specific reference to starter packs, exacerbated by the impact of Covid-19 on Glocell Distribution’s financial performance.

Fair value estimate

A discounted cash flow valuation of Glocell Distribution has been used to determine the value of Glocell’s 40% shareholding in Glocell Distribution. This is used to determine the fair value of the loan. This valuation has been performed by the finance department of the Group using cash flow projections based on forecasts for up to five years, which are based on assumptions of the business, industry and economic growth.

The derivatives are level 3 instruments in the fair value hierarchy.

Key assumptions applied to value-in-use calculation
2021 
2020 
Discount rate (pre-tax) 20.8  21.0 
Terminal growth rate  5.0  4.5 
(Decrease)/increase
in loan at fair value
Effect on fair value due to change in key assumption 
2021 
2020 
Change in discount rate  (11 689) (12 147)
(1) 13 867  14 414 
Change in terminal growth rate  20 269  21 048 
(2) (14 442) (14 994)

Put option liability

Put option liabilities represent contracts that impose an obligation on the Group to purchase the shares of a subsidiary for cash or another financial asset. Put option liabilities, where the risks and rewards reside with the non-controlling interest, are initially raised from the transaction with non-controlling interest reserve in equity at the present value of the expected redemption amount payable. Subsequent revisions to the expected redemption amount payable as well as the unwinding of the discount related to the measurement of the present value of the put option liability, are recognised in the income statement. Where a put option liability expires unexercised or is cancelled, the carrying value of the financial liability is released to equity profit and loss. The Group recognises the non-controlling interest over which a put option exists at acquisition date. Where a put option liability is substantially modified it is accounted for as an extinguishment of the original financial liability under IFRS 9 and, to the extent applicable, a new financial liability is recognised. The difference arising between the carrying amount of original financial liability and the fair value of the new financial instrument is recognised in profit and loss.

Critical accounting judgements and assumptions

Management assessed on initial recognition of the put option liability that the risks and rewards of ownership remained with the non-controlling interest and therefore no adjustment was required to the non-controlling interest.

Derivative liability

The derivative liability relates to the put option liability for Airvantage. As explained under the heading Financial performance and cash flow information in the note on discontinued operations, significant management judgement was applied in determining the extent that the exercise price does not represent the fair value of the underlying shares.

In October 2020, the minority shareholders of Airvantage and AV Tech exercised their rights to put their 40% shareholding therein to Blue Label Telecoms (BLT), in line with the initial agreements that were concluded between the parties in 2017. The purchase consideration under the put options, as determined by the parties in December 2020, for the 40% shareholdings in Airvantage and AV Tech, amounted to R152 million and USD4.6 million respectively (purchase price).

In February 2021, the parties concluded an agreement legislating for a deferral of the purchase price payable to the minority shareholders of Airvantage and AV Tech from 31 December 2020 to 31 March 2021, payable in six equal monthly instalments, inclusive of interest, commencing on 31 March 2021. In May 2021, the parties concluded an amendment to the agreement legislating for a deferral of the purchase price payable to the minority shareholders of Airvantage and AV Tech from 31 March 2021 to 31 August 2021, payable in six equal monthly instalments, inclusive of interest, commencing on 31 August 2021.

If Cell C Limited is able to pass a solvency and liquidity test, the primary obligation in respect of the put options can be transferred to DE, formerly Blue Label Mobile Proprietary Limited, in terms of the agreement concluded with it in September 2019.

The amount at which the put and call options were contractually determined based on the 31 May 2020 audited results at a six times net profit after tax multiple. This formula has been used in determining the total value of the put option liability. As the VAS Operations disposal group (which included Airvantage and AV Technology) was sold at a similar net profit after tax multiple, the multiple is deemed to be representative of a fair market multiple to be used in calculating the value of the shares. However, management has taken into account the adverse impact on Airvantage’s operations should the solvency and liquidity of Cell C remain unproven, since the Airvantage business is largely dependent on Cell C. Therefore the derivative has been measured at the difference between the fair value of Airvantage and the exercise price of the put option. Accordingly, these inputs are level 3 inputs per the fair value hierarchy.

The same facts and circumstances were taken into account in this accounting judgement as were taken into account in note on Cell C Limited “Critical accounting judgement and assumptions – Going concern of Cell C” with management concluding the following:

Total value of Airvantage put option liability in USD’000 as agreed to by the parties

10 138

Total value of Airvantage put option liability in R’000 as agreed by the parties

139 140

Attributed probability percentage of the solvency and liquidity of Cell C remaining unproven (B)

49%

Extent that the exercise price does not represent the fair value of the underlying shares (A x B)

68 178

Should management have attributed a 100% probability to the solvency and liquidity of Cell C being proven, the entire put option would have been considered to be at value and, as such, no liability would have been recognised. Conversely, should management have attributed a 0% probability to the solvency and liquidity of Cell C being proven, the entirety of the portion of the put option related to Airvantage would have been considered to not be at value and, as such, a liability of R139 million would have been recognised. The put option over the shares of AV Tech is considered to be at fair value as the operations and results of the entity upon which the valuation is based have remained largely unchanged and six times net profit multiple is consistent with the earnings multiple at which the shares in the entity have been disposed of as part of the VAS Operations disposal.

Surety loans receivable

Surety loans relate to the personal sureties that B Levy and M Levy signed for the loan owed by 2DFine Holdings Mauritius to Gold Label Investments Proprietary Limited. Their liability is limited to the difference between the loan owing to Gold Label Investments Proprietary Limited and the value of 16.95% of the shares in Oxigen Services India Private Limited (Oxigen Services) and 17.29% of the shares in Oxigen Online Services India Private Limited (Oxigen Online) and as such is a level 3 instrument in the fair value hierarchy. In the prior year payment terms for the surety loans were renegotiated, with the payments being agreed as instalments payable annually commencing on 30 September 2021 and ending on 30 September 2030. Based on the payment terms, nine tenths of the surety loan receivable is recognised as non-current. In the 2019 financial year the loan owing to Gold Label Investments Proprietary Limited was impaired, and remains impaired, due to a decrease in the fair value of Oxigen Services and Oxigen Online resulting in the Group recognising a receivable on the surety claim.