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Sasol (SSL) Risk Analysis
Risk Overview Q2, 2020
Source: the company's latest filing for the period ended Jun 30, 2020, filed Aug 24, 2020
Risk Change Over Time
No filing history is available.
- Share Price & Shareholder Rights - Risk 1Holders of Sasol's ordinary shares or ADSs may be subject to dilution as a result of any non-pre-emptive share issuance, and shareholders outside South Africa or ADS holders may not be able to participate in future offerings of securities (including Sasol's ordinary shares) carried out by or on behalf of Sasol
Future share issuances by Sasol, with or without subscription rights, could (depending on how the share issuance is structured) dilute the interests of existing shareholders or require them to invest further funds to avoid such dilution. In the case of an equity offering with subscription rights, holders of Sasol's shares in certain jurisdictions may not be entitled to exercise such rights unless the rights and the related shares are registered or qualified for sale under the relevant legislation or regulatory framework. In particular, holders of Sasol's securities who are located in the United States (including those who hold ordinary shares or ADSs) may not be able to participate in securities offerings by or on behalf of Sasol unless such equity offerings are registered under the U.S. Securities Act of 1933 (the Securities Act) or exempted from registration under the Securities Act. Holders of these shares in these jurisdictions may therefore suffer dilution should they not be permitted to, or otherwise choose not to, participate in future equity offerings with subscription rights.
- Accounting & Financial Operations - Risk 2We identified material weaknesses in our internal control over financial reporting, which we are still in the process of remediating. If we are unable to remediate these material weaknesses, or if we experience additional material weaknesses or other deficiencies in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately and timely report our financial results, which could cause shareholders to lose confidence in our financial and other public reporting, and adversely affect our share price
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control. Under Item 15. Controls and Procedures, two material weaknesses in internal control over financial reporting were disclosed for the financial year ended 30 June 2020. The first was identified during 2019 and relates to the capital cost estimation process implemented in connection with the LCCP. The second was identified in 2020 and relates to the level of precision applied to the impairment assessments performed as at 30 June 2020 on certain cash generating units related to the South Africa integrated value chain within one segment of the company. Both material weaknesses are still in the process of being remediated. While we are currently implementing remedial measures, there can be no assurance that our efforts will be successful. The material weaknesses cannot be considered remediated until the remedial controls operate for a sufficient period of time and management has time to conclude, through testing, that these controls are operating effectively. As a result of the material weaknesses described above, management concluded that our disclosure controls and procedures remain ineffective as of 30 June 2020. We cannot be certain that any remedial measures we are currently in the process of implementing, or our internal control over financial reporting more generally, will ensure that we design, implement and maintain adequate controls over our financial processes and reporting in the future. Our failure to implement our remediation plans referred to above, or to implement newly required or improved controls or adapt our controls, or difficulties encountered in their operation, or difficulties in the assimilation of acquired businesses into our control system, could prevent us from meeting our financial reporting obligations, including filing our periodic reports with the SEC on a timely basis and maintaining compliance with applicable NYSE listing requirements, or result in a restatement of previously disclosed financial statements. If other currently undetected material weaknesses in our internal controls exist, they could result in material misstatements in our financial statements requiring us to restate previously issued financial statements. In addition, material weaknesses, and any resulting restatements, could cause investors to lose confidence in our reported financial information, and could subject us to regulatory scrutiny and to litigation from shareholders, which could have a material adverse effect on our business and the price of our ordinary shares or American Depositary Shares (ADSs). Furthermore, the remediation of any such material weaknesses could require additional remedial measures including additional personnel, which could be costly and time-consuming. The implementation of the remediation actions could further be impacted by the increased demand on employees as activities increase on our comprehensive response plan to conserve cash and optimise the business and the personnel impact of the strategic reset through Future Sasol. If we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our share price and adversely affect our results of operations and financial condition. Failure to comply with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
- Debt & Financing - Risk 3Our access to and cost of funding is affected by our credit rating, which in turn is affected by, among other factors, the sovereign credit rating of the Republic of South Africa
Sasol's credit rating is impacted by our business performance and leverage, as well as the financial policy and sovereign rating of the Republic of South Africa, and other factors such as global oil and chemical market conditions which may be outside of our control. In March 2020, Moody's Investor Services (Moody's) and S&P Global (S&P) downgraded Sasol to sub-investment grade. South Africa's credit rating was downgraded by Moody's in March 2020 and by S&P in April 2020. In the future, Sasol's credit rating could also be further negatively impacted if the South African sovereign rating is further downgraded. In addition, Sasol's credit rating may be further downgraded if Sasol's credit metrics deteriorate outside the guidance provided by the rating agencies. As a result of Sasol's downgrades: - the cost of debt on certain existing facilities has increased; - the cost of debt on any new facilities will likely be higher; and - access to funding in both the bank market and the debt capital markets will likely be more limited.
- Debt & Financing - Risk 4Our level of indebtedness and our ability to comply with any debt covenant could have a material adverse impact on our financial position and results and/or liquidity
We have a substantial amount of indebtedness. Our vulnerability to the adverse economic conditions brought about by COVID-19 is therefore increased. This increases the risk of not meeting the contractual provisions of our loan agreements. Our principal credit facilities contain restrictive covenants. These covenants limit, among other things, encumbrances on existing assets of Sasol and its subsidiaries, the ability of Sasol and our wholly-owned subsidiaries to incur incremental debt and the ability of Sasol and its subsidiaries to dispose of assets in certain circumstances. These restrictive and financial covenants could limit our operating and financial flexibility. On 17 June 2020, we concluded amendment agreements with respect to our key loan agreements to (a) waive compliance with the net debt to EBITDA covenant for the last twelve months or measurement period ended 30 June 2020 and (b) increase the net debt to EBITDA covenant for the last twelve months or measurement period ending 31 December 2020 to 4,0 times, after which it will revert to a maximum level of 3,0 times as at 30 June 2021. In order for the amendments to be approved, lenders required several further terms and conditions, which are in force during the measurement periods affected by the amendments, to be incorporated as part of the amendment agreements, key of which are: - restrictions on our capital expenditure for the financial year ending 30 June 2021 that it will not exceed the forecast level of R21 billion by more than 10%; - no dividend payments; and - no acquisitions. The current level of indebtedness and the contractual provisions in our loan agreements also limit our ability to obtain further debt financing. Should the company be unable to illustrate that it has sufficient access to liquidity, there will be an increased possibility of further downgrades to our credit rating and challenges to our ability to operate. Further downgrades to our credit rating will also adversely affect our cost of financing, restrict our ability to grow and may force us to make non-strategic divestments that could impact our long-term sustainability. A substantial portion of cash flows from operations is required to meet the payment of principal and interest on our existing debt, which will limit our ability to use our cash flow for other purposes such as: - to fund capital expenditure in our operations; - to pay dividends; and - to fund future business opportunities. The majority of our debt is denominated in US dollars, exposing us to risks related to fluctuations in foreign currency to the extent that our US dollar cash generation is insufficient to service such debt, thus exacerbating the risks associated with our substantial financial leverage. In addition, our covenant reported as at each period end is highly sensitive to fluctuations in the closing rand/US dollar exchange rate due to the currency translation of US dollar debt to the rand reporting currency at period end. We are exposed to a number of inherent business risks, including, for example, unplanned production outages, lower margins for our products, higher-than-anticipated capital requirements for projects under development, as well as other risks described in this section, any of which, or a combination of which, could cause us to breach our debt covenants during a reporting period. This risk is exacerbated by the COVID-19 pandemic and its impact on our turnover and profitability. Failure to comply with any covenant would enable the lenders to accelerate repayment obligations and will lead to cross-defaults with the other facilities. Sasol's credit facilities have standard provisions whereby certain events relating to other borrowers within the Group could, under certain circumstances, lead to default and/or acceleration of debt repayment under the credit facilities and other borrowings. Should cross-default clauses be triggered, this will likely create liquidity pressures and create a risk for the sustainability of Sasol. In addition, the mere market perception of a potential breach of any financial covenant could have a negative impact on our share price and our ability to refinance indebtedness or the terms on which this could be achieved, which would place pressure on the validity of our going concern assumption.
Risk Highlights Q2, 2020
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 41
- Share Price & Shareholder Rights - Risk 1Sales of a large amount of Sasol's ordinary shares and ADSs could adversely affect the prevailing market price of the securities
Historically, trading volumes and the liquidity of shares listed on the JSE have been low in comparison with other major markets. The ability of a holder to sell a substantial number of Sasol's ordinary shares on the JSE in a timely manner, especially in a large block trade, may be restricted by this limited liquidity. The sales of ordinary shares or ADSs, if substantial, or the perception that these sales may occur and be substantial, could exert downward pressure on the prevailing market prices for Sasol ordinary shares or ADSs, causing their market prices to decline.
- Share Price & Shareholder Rights - Risk 2The exercise of voting rights by holders of American Depositary Receipts is limited in some circumstances
Holders of American Depositary Receipts (ADRs) may exercise voting rights with respect to the ordinary shares underlying their ADSs only in accordance with the provisions of our deposit agreement (Deposit Agreement) with J.P. Morgan Chase Bank N.A. (J.P. Morgan), as the depositary (Depositary). For example, ADR holders will not receive notice of a meeting directly from us. Rather, we will provide notice of a shareholders meeting to J.P. Morgan in accordance with the Deposit Agreement. J.P. Morgan has undertaken in turn, as soon as practicable after receipt of our notice, to mail voting materials to holders of ADRs. These voting materials include information on the matters to be voted on as contained in our notice of the shareholders meeting and a statement that the holders of ADRs on a specified date will be entitled, subject to any applicable provision of the laws of South Africa and our MOI, to instruct J.P. Morgan as to the exercise of the voting rights pertaining to the shares underlying their respective ADSs. Upon the written instruction of an ADR holder, J.P. Morgan will endeavour, in so far as practicable, to vote or cause to be voted the shares underlying the ADSs in accordance with the instructions received. If instructions from an ADR holder are not received by J.P. Morgan by the date specified in the voting materials, J.P. Morgan will not request a proxy on behalf of such holder. J.P. Morgan will not vote or attempt to exercise the right to vote other than in accordance with the instructions received from ADR holders. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct J.P. Morgan to vote the shares underlying your ADSs. In addition, J.P. Morgan and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be no recourse if your voting rights are not exercised as you directed.
- Share Price & Shareholder Rights - Risk 3(e) Stakeholder relationships
Sasol has a complex network of stakeholders, often with competing interests. Beyond our financial community, our stakeholders are persons or groups who are directly or indirectly affected by our operations, as well as those who have interests in our business and/or the ability to influence its outcomes. Stakeholders may include members of local communities and their representatives, national, provincial or local government authorities, officials at all spheres of government, government agencies, multilateral organisations, regulators, political and religious leaders, civil society organisations and groups with special interests, suppliers, investors, business partners, customers, employees, trade unions, academics and media. Failure to manage relationships with our stakeholders may harm our reputation as well as our ability to conduct our operations effectively. Our stakeholder objective is to position Sasol as a credible partner and build trust with all our stakeholders. Our engagement approach is premised on open and effective communication and mutually beneficial outcomes where possible, as well as inclusiveness and integrity. Given the impact of the low oil price and the COVID-19 pandemic, we may not be able to meet some stakeholder commitments in 2020, and this may have a material impact on stakeholder relations. Various processes have been put in place to engage with stakeholders on these issues and to mitigate the associated risks. However, we cannot assure you that the strategy will mitigate the risk fully and therefore, actions taken by stakeholders could have a material adverse effect on our business, operating results, cash flows, financial condition and future growth.
- Share Price & Shareholder Rights - Risk 4ChangedHolders of Sasol's ordinary shares or ADSs may be subject to dilution as a result of any non-pre-emptive share issuance, and shareholders outside South Africa or ADS holders may not be able to participate in future offerings of securities (including Sasol's ordinary shares) carried out by or on behalf of Sasol
Future share issuances by Sasol, with or without subscription rights, could (depending on how the share issuance is structured) dilute the interests of existing shareholders or require them to invest further funds to avoid such dilution. In the case of an equity offering with subscription rights, holders of Sasol's shares in certain jurisdictions may not be entitled to exercise such rights unless the rights and the related shares are registered or qualified for sale under the relevant legislation or regulatory framework. In particular, holders of Sasol's securities who are located in the United States (including those who hold ordinary shares or ADSs) may not be able to participate in securities offerings by or on behalf of Sasol unless such equity offerings are registered under the U.S. Securities Act of 1933 (the Securities Act) or exempted from registration under the Securities Act. Holders of these shares in these jurisdictions may therefore suffer dilution should they not be permitted to, or otherwise choose not to, participate in future equity offerings with subscription rights.
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