ONE BILLION REASONS BANK ASKS DE BEERS FOR COLLATERAL
The De Beers 2009 financial results indicated that the company’s market influence still extends well beyond the 40 percent global production share it holds. Indeed, Chairman Nicky Oppenheimer shared that De Beers tries to ‘never waste a good crisis!’ Many of the trends that evolved in the diamond market were evident both at the mining giant as well as being prompted by it. In a move of self preservation, to prevent an oversupply of diamonds coming onto the market during the downturn, De Beers was the first to mothball its mines and subsequently raise its monopolistic prices. De Beers responded to the recession by implementing its action plan policy of ‘lowering production levels in line with client demand, cost savings and operating efficiencies and the stimulation of consumer demand.’ To a greater extent, De Beers appears to have achieved these goals.
While, in many ways, the global diamond market mirrored the trends seen at De Beers, one development set the mining giant apart from the rest: a $1 billion bailout from its shareholders.
De Beers shareholders – Anglo American, the Oppenheimer family and the Botswana government agreed to invest $1 billion in new equity to boost the company’s balance sheet by reducing its overall debt levels. The pledge enabled De Beers to finalize the financing terms with its lenders, which in turn will enable it to renew a $3 billion credit facility, $1.5 billion of which was due to expire this month. These negotiations were clearly not easy and as RDR predicted in August, the banks have agreed to restructure the loan, but with more stringent conditions, whereby ‘De Beers will have to provide better collateral to guarantee the loan.’
The very need for such a guarantee illustrates the tough nature of the negotiations and indicates that the banks were less than impressed with the De Beers balance sheet as it currently stands. They clearly viewed the company as a risky investment during the recession and even as it moves into the post-recession period. In all likelihood, banks view the industry as a whole in the same way.