NINE months after revelations that Madison Asset Management Company (Mamco) is in financial distress, its creditors are still in the dark about any settlement of what’s due to them.

Mamco is owned by Madison Financial Services, which is, in turn, a subsidiary of Zambia’s most “successful” home-grown finance and insurance group, Lawrence Sikutwa & Associates.

Madison Group of Companies Company Organisation Chart

A threat to the latter, which has 18 subsidiaries, would send shockwaves through the country’s financial sector.

Lawrence Sikutw

Adding to the jitters is that the group’s chairperson, Lawrence Sikutwa, was a top executive in the Meridien-Biao banking empire, which collapsed spectacularly 25 years ago.

The bombshell came via a press release by the Securities and Exchange Commission in early March, announcing that it took supervisory possession of Mamco to safeguard investors’ interests.

“We wish to allay the fears that Mamco has been closed or is undergoing liquidation,” the commission’s chief executive, Phillip Chitalu, announced at the time.

Alarmed by murmurs circulating for months in Lusaka’s financial circles, sceptics were not reassured by Chitalu’s statement. It was only a matter of time before the bubble burst, threatening the parent company's entire edifice.

A “scheme of arrangement” negotiated between the company and creditors revealed that Mamco owed unsecured creditors – including state institutions, banks and many ordinary investors who have risked their life savings – US$19 million at the prevailing September 2019 Kwacha-U.S. Dollar exchange rate.

It also revealed that in the 2018 financial year, it suffered a pre-tax loss of K26 million.

Group chairperson Sikutwa maintains that Madison Financial Services has embarked on “a restructuring and rationalisation” exercise that will see some of its subsidiaries' business being shared.

While admitting that certain of the subsidiary companies face “challenges,” he dismissed outright assertions that Mamco’s difficulties pose a threat to the group's viability as a whole.

Steps taken to address the problems include injecting new capital into the business, seeking new partners and rebuilding trust, Sikutwa said.

The group’s significant arms are travel and tourism, health insurance pharmaceuticals, insurance, property management and financial services.

Its shareholders are Lawrence Sikutwa with 64.5% of the stock, Roydie Chisanga with 32.25% and William Fyfe with 3.34%.

Sikutwa and Chisanga are former senior executives of Meridien Biao Bank, the vast banking empire that collapsed like a house of cards in the mid-1990s.

Meridien BIAO was founded and chaired by Cypriot-born Zambian Andrew Sardanis by merging Meridien group banks, and a network of 11 banks acquired from the French liquidator of Banque Internationale pour L’Afrique Occidentale.

Financial experts told MakanDay that Sikutwa’s group company structure appears to be “a cut and paste” of the Meridien-Biao group.

An intricate web of cross-ownership characterises both. Meridien was composed of Meridien Properties, Meridien Insurance, Meridien Financial Services and numerous other companies that splintered off and became independent operations after it closed.

At the time of Meridien BIAO’s collapse in May 1995, the group was Zambia’s fourth-largest bank, with a continental network of branches across east, southern and west Africa.

As outlined in the scheme of arrangement documentation, Mamco is the stressed entity within the Madison group, with particular concerns focused on an investment involving 337 unsecured creditors.

Mamco offered investors a generous 18% return rate, based on the trust that investors placed in the company’s track record and brand perception of the Madison group. The investors in this fund were corporations, charities, retired military servicemen, churches, religious groups, health clinics, banks and tertiary educational establishments and several pensioners.

The biggest unsecured investor is the Zambia Episcopal Conference, with an investment of US$1.6 million (K20.9 million), followed by Thomas Sayer, with U.S.$1.1 million (K13.6 million). Sixty of the investors are exposed to the tune of more than a million kwacha. The dollar amounts owed are computed at the prevailing September 2019 exchange rate.

Eight of the creditors are owed in U.S. dollar denominated investment funds.

These include Thomas Sayer, Kachasa Katai Ltd, Societies for Missionaries of Africa and African Banking Corporation.

On September 30 last year, when the initial draft of the arrangement scheme was finalised, unsecured creditors were owed K248.5-million. At the prevailing kwacha-dollar exchange rate of that date, this amounted to about US$19 million.

In the event of a Mamco bankruptcy, the unsecured creditors would have a general claim on its assets – less than the amount secured creditors can claim.

The scheme of arrangement’s critics allege that it was “an onerous presentation that appeared more like a time-buying ploy with no hope of success.”

It suggested a recapitalisation of the business, the disposal of Mamco assets, liquidation, and a freeze to investors' claims and interests. The ultimate objective is to sustain Mamco as a going concern, even if it failed to produce a profit.

Meanwhile, a 19th October 2020 memo to Mamco creditors seen by MakanDay revealed that one of the options on the table is the sale of Mamco parent company Madison Financial Services (MFS) assets.

In that regard, MFS had written to “the Securities Exchange Commission and the Mamco creditors committee on 13th October 2020 that the due diligence had progressed, and that transaction completion date was set for 31st October 2020.”

MFS assets under consideration for sale include LSA House along Lusaka’s Independence Avenue, the Buboni Housing Project, and Hillview Estate, consisting of commercial and residential properties. But with the collapse of the Zambian property market a few years ago, there are doubts on what  realisable value would be retained from a forced sale.

Also unclear is whether or not MFS shareholders had sanctioned the decision to offload the firm’s assets as part of the Mamco income generation rescue package, and what possible effect this might have on LSA’s bottom-line value, given the prominence of MFS as part of the LSA group of companies.

Initially receptive to MakanDay’s request for an interview to outline and confirm the stage reached in the negotiations with creditors, group executive chairman Sikutwa later declined to comment, referring MakanDay’s inquiries to the SEC “for clearance.”

“Mamco management have to seek SEC approval before acting on anything relating to Mamco, SEC are the regulators of Mamco. Anything that happens in Mamco can only be authorized by the interim Mamco management appointed by SEC. Even this interview cannot go without their knowledge or approval. Can you seek approval from SEC on behalf of Dr. Sikutwa to talk to you?” said his company personal assistant.

According to Corpus, “the company has experienced a great number of challenges since 2017, which has led to major financial losses”.

It noted that Mamco reported an operating loss of K40.5-million for the year ending December 2017 and K26.5-million for the year ending December 2018.

There was a mismatch between current assets and current liabilities of K35.1-million.

“The adverse performance has been driven primarily by exposure to a non-performing counter-party which in turn has deteriorated the performance of the company’s fixed income fund. The company also has an imbalance in its exposure to non-performing property,” Corpus said.

It did not identify the “non-performing counter-party.”

Corpus said that by opting to maintain the company as a going concern and carrying out various rationalisation measures as suggested in the scheme, the unsecured creditors “stood a chance of recovering all their capital outlay over the five-year proposed duration of the scheme.”

However, this would be at a reduced return of 10%, compared to the 18% initially agreed.

MakanDay understands that 25 creditors that were owed less than K50 000 were paid off.

Of LSA’s 18 subsidiaries, Mamco wholly owns three: Madison Capital Limited, Hillview Estates Limited and Madison Unit Trust Company Limited.

According to Mamco’s 2017 audited accounts, on which the scheme of arrangement is largely based, the company has no physical assets of its own.

However, a property search at the Ministry of Lands shows that its subsidiary, Madison Capital, owned 42 properties when Mamco was declared to be in distress. Some of these assets may have been sold off since the proposed scheme of arrangement.

The accounts, audited by KPMG, pose several unanswered questions:

  1. Mamco’s revenues do not include property rentals, although the company has properties and signed leases.
  2. The balance sheet has K16.1 million of intangible assets, comprising a customer list for K12 million and computer software worth K4 million. How can these intangible “assets” hold if the company’s operations are impaired and result in operating losses? Does this assertion hold with International Financial Reporting Standards?

3. Experts assert that Mamco’s subsidiaries should be consolidated and Mamco’s financial position and operations should be consolidated into the public company, Madison Financial Services Plc

4. Experts also argue that Mamco is not a going concern, and the auditors should have issued an adverse opinion regards the 2017 financial statements.

MakanDay attempts to get clarity from KPMG elicited the following response from Cheelo Hamuwele, whose name appears in the KPMG 2017 audited accounts:

“Please note that our responsibility is to audit the financial statements of a client. The responsibility for the preparation of the financial statements lies with the directors and management of the client. Due to the client confidentiality provisions of the terms of our engagement, we are unable to comment further and recommend that you contact Mamco or its provisional managers for more information.”

Concerns have also been raised about Madison’s lack of urgency in reaching a final agreement guided by the scheme of arrangement. On several occasions, the process has been amended.

There is an added fear that disharmony has crept into the creditors’ committee with the case dragging on unresolved and that compromised members “who might have been manipulated” could have hampered the negotiations.

“Some people will die, others will not even know what the story is all about,” an observer familiar with the Mamco issue told MakanDay.

With the kwacha rapidly depreciating against the dollar, the value of their investment also stands to fall.

Another possible bone of contention is Mamco’s non-payment of interest to creditors.

In 2017, the company had accumulated losses of K23 million, with pre-tax loss of K40.4 million. After providing for taxes, the loss was K44 million.

Despite this, MakanDay has learned that shareholders paid themselves a dividend of K2.3 million.

Under Zambian company law, loss-making companies are prohibited from paying dividends. But when arriving at their opinion, the auditors somehow omitted to pinpoint this legal prohibition.

Ordinarily, shareholders stand last in line for payment if a company goes bust.

Additionally, red flags were raised when it was noted that while in the middle of the negotiations with creditors, assets were allegedly being disposed of despite being shown as non-existent in the scheme of arrangement documentation. While Mamco has very few physical assets, one of its subsidiaries, Madison Capital, had 42 properties.