CAPITAL RISK MANAGEMENT

The group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern and provide optimal returns for shareholders through maintaining an optimal capital structure.

The group defines capital as equity funding provided by shareholders and debt funding from external parties. Shareholder funding comprises permanent paid-up capital, share premium, revenue reserves and other reserves as disclosed in the balance sheet. Debt funding comprises loans from shareholders, banking institutions and corporate bonds and net debt represents gross debt net of all cash reserves.

The board’s policy is to maintain a strong capital base so as to maintain investor and creditor confidence and to sustain future development of the business. The board of directors monitors the cost of capital, which the group defines as the weighted average cost of capital, taking into account the group’s internally calculated cost of equity (shareholder funding) and long-term cost of debt assumptions.

The board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound equity position. The group’s debt capacity and optimal gearing levels are determined by the cash flow profile of the group and are measured through applicable ratios such as net debt to Ebitdar and interest cover which ratios were complied with throughout the year. These ratios provide a framework within which the group’s capital base is managed. The group’s current utilisation of debt facilities is shown in note 49.1(c).

In order to maintain or adjust the capital structure, in the absence of significant investment opportunities, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

Under the terms of the borrowing facilities, the group is required to comply with the following financial covenants:

Tsogo Sun Hotels:

• Ebitda covers net interest by at least 3.0 times; and
• Net debt:Ebitda required to be less than 2.5 times

Hospitality:

• Ebitda covers net interest by at least 2.0 times;
• Net debt:Ebitda required to be less than 2.5 times; and
• Loan to value ratio is required to be less than 40%

Ebitda is defined as earnings before interest, taxation, depreciation, amortisation, long-term incentives and exceptional items.

No debt covenants in respect of external borrowings were breached during the year under review. The covenants are monitored and reported to the board and chief operating decision maker on a quarterly basis. Apart from the external debt borrowing covenants, the group is not subject to externally imposed capital requirements, with the exception of HPF. HPF, being a REIT status entity, is subject to its total liabilities being limited by the Listings Requirements of the JSE for REITs to 60% of total assets. Furthermore, HPF’s borrowings are limited in terms of the Listings Requirements of the JSE to 60% of the directors’ bona fide valuation of the consolidated property portfolio of HPF. These requirements were not breached during the year under review.

During the year under review, the group’s internal covenants strategy was to ensure that net debt was no more than 3.0 times (2019: 3.0 times) Ebitdar. Ebitdar, being the driver of profitability and equity contributor, is the critical measurement criteria used to manage debt and capital levels.