STRICTLY PRIVATE AND CONFIDENTIAL ENCLOSURE 4 ZCCM INVESTMENTS HOLDINGS PLC STRATEGIC OPTIONS ON INVESTRUST PLC (INVESTRUST) Prepared by SPECIAL SUB-COMMITTEE TO THE INVESTMENTS COMMITTEE OF THE BOARD April 2017 Table of Contents 1. BACKGROUND AND INTRODUCTION 3 2. ANALYSIS OF THE FINANCIAL PERFORMANCE OF THE BANK 5 3. ASSESSMENT OF CAPITAL STRUCTURE 10 4. POTENTIAL BENEFITS AND CHALLENGES OF HOLDING OF THE INVESTRUST INVESTMENT. 11 5. KEY RISK ANALYSIS 12 6. CONCLUSION & RECOMMENDATION 18 7. ANNEXURE LIST 21 1. BACKGROUND AND INTRODUCTION ZCCM Investments Holdings PLC (“ZCCM-IH” or the “Company”) is currently the majority shareholder in Investrust Bank PLC (“Investrust” or the “Bank”), holding 45.4% of the issued share capital of the Bank. ZCCM-IH previously held a 10% shareholding in Investrust and subsequent to underwriting the Rights Offer undertaken by the Bank from 29 February 2016 to 30 April 2016, ZCCM-IH’s shareholding in the Bank increased to 48.6%. ZCCM-IH proceeded to sell down to its current shareholding of 45.4% in December 2016 pursuant to the Share Sale and Purchase Agreement between ZCCM-IH and Meanwood Venture Capital (“MVC”). On the 26th of January 2017 the Investment Committee of the Board (“ICB”) for ZCCM-IH reviewed the Company’s investment in the Bank. Upon reviewing the current state of affairs, the ICB expressed concerns relating to the continued adverse performance. The ICB felt it necessary to review and interrogate the following critical aspects of the Bank: • The health status of the Bank, particularly given the recent spate of bank failures. • The Banks’ going-concern status, viability and strategic survival plans; • ZCCM-IH’s investment risk profile introduced by the recent underwriting agreement; • Regulatory risk and solvency matters; • Legal standing on pertinent investment matters. In order to address the above concerns, the ICB resolved to constitute a Sub-Committee comprising the following members: Name Title Organisation Mr. Charles Mpundu Chairperson ICB Member Mr. Basil Nundwe Member ICB Member Mr. Mabvuto Chipata Member ZCCM-IH Mr. Situmbeko Mubano Member ZCCM-IH Mr. Tapiwa Msusa Member ZCCM-IH The Sub-Committee was mandated to undertake the following: a. Analyse and review the current financial performance of Investrust and the Bank’s future prospects and possible recapitalization needs; b. Critically reassess the effectiveness of the Bank’s capital structure post the preference share issuance from a regulatory and operational point of view; c. Evaluate the Bank’s liquidity and solvency position; d. Identify the significant rewards and challenges of holding the investment in Investrust and their resulting impact(s) on ZCCM-IH; e. With reference to (a),(b),(c) and (d) above, consider and explore possible options or investment strategies that may be available to ZCCM-IH going forward with regards to Investrust including but not limited to: i. A partial or complete divestiture from the Bank; ii. Consolidation of the current investment in the Bank; and iii. Prompt an outright Takeover or Merger by a third party. f. Recommend to the ICB, the suitable option(s) available to ZCCM-IH and the rationale behind any such recommendation; g. Develop and propose the steps to be taken in order to implement the desired option(s); and h. Spearhead the implementation process and ensuring the desired outcome for ZCCM-IH is achieved. The Sub-Committee, accordingly met over the months of February and March 2017 to execute the requisite task at hand. In executing the mandate by the ICB, the Sub-Committee reviewed the following documents (also annexed hereto): a. The Securities Act No. 41 of 2016; b. The Lusaka Securities Exchange Listing Requirements; c. The Banking and Financial Services Act; d. The Rights Offer Underwriting Agreement between ZCCM-IH and Investrust; e. The Share Sale and Purchase Agreement between ZCCM-IH and MVC; f. Circular to Shareholders for the Preference Share Issuance of December 2016; g. Subscription Agreement between Meanwood Financial Services Limited (“MFS”) and Investrust in respect of the Preference Share Issuance of December 2016; h. The Investrust Corporate/Strategic Plan; i. The Terms of the Bank of Zambia (“BoZ”) Emergency Liquidity Assistance (“ELA”) Loan Facility granted to Investrust; j. Management Accounts for 2016 and Year-to-date February 2016; and k. Audit Management Letter for 2015. Limitations The information required for a complete assessment of Investrust Bank Plc is dependent on the completeness, accuracy and timeliness of the information received from the Management of the Bank. Thus far, not all relevant information requested has been availed in a complete and timely manner. This has contributed to the delay in completion of the task at hand. As of the time of the completion of this report, the following information and clarifications from Investrust was still outstanding, inter alia: a. Audit Management Letter for 2016; b. Audited Financial Statements for 2016; c. Recent BoZ prudential returns; d. Investrust Security Schedule, including the security provided to BoZ under the ELA Loan Facility; e. Proof of compliance with BoZ liquidity facility financial covenants f. Full details of the litigations against the Bank. 2. ANALYSIS OF THE FINANCIAL PERFORMANCE OF THE BANK A review of the year-to-date management accounts (Annexure 10) of Investrust Bank PLC up to February 2017 revealed that the Bank’s loss during the two month period to 28 February 2017 is substantially worse than budget at a loss of ZMW 11,731,801 against a budgeted loss of ZMW 6,039,758. The Sub-Committee assessed the Bank’s solvency position by comparing the semi-liquid to liquid assets (total assets excluding Investment Property, Fixed Assets, Deferred Taxation, Tax and Other Assets) against its liabilities (predominantly deposits innately), and it was observed that the banks’ liabilities as at 28 February 2017 were in excess of the liquid to semi-liquid assets by ZMW 179.039 million – which raises concerns of the ability of the Bank to settle its short-term obligations as they fall due. In addition, the Sub-Committee reviewed the Bank’s historical and projected financial performance as provided by the Management of the Bank in the Bank’s 5-year Corporate Plan (Annexure 8). The financial projections presented in the Corporate Plan were subsequently compared with the projections generated by the Independent Reporting Accountant (“IRA”) for the Preference Share Issuance, Grant Thornton in their Report embedded in the Circular to Shareholders (Annexure 6). The Sub-Committee was of the opinion that both sets of projections should ideally be reasonably similar, however, the following relatively significant discrepancies were noted: a. Net interest income was projected as ZMW 84.9 million for 2017 in the IRA Report vs. ZMW 66.9 million in the Corporate Plan; b. A profit was projected for 2017 (i.e. ZMW 5.4 million) in the IRA report while the Corporate Plan projected a loss of ZMW 20.8 million; and c. The Corporate Plan does not explicitly show the preference shares on the balance sheet and the accounting treatment thereof varies from the IRA Report (the share premium reserve presented in the Corporate Plan is more than twice the balance disclosed on the IRA Report, with the former disclosed at ZMW 159.9 million versus the latter ZMW 62.1 million). For details kindly refer to Section 3 of this paper relating to the accounting treatment of the preference share issuance. The above noted discrepancies and the assumptions made in the Corporate Plan (pages 34 – 48 of Annexure 8) offered the Sub-Committee very little insight into the Bank’s turnaround strategy and the specific steps to be taken. Consequently, the Sub-Committee could not place reliability on the two projections provided and decided to produce its own set of projections based on more historically sanitized projections. Figures 1 and 2 on the following pages show the projected performance, in the Sub-Committee’s view, if the current status quo were to be maintained. N/B: The legal claims (outlined in Part b. under Legal Risks) against the Bank were not provided for in the projections. Summary of key financial ratios (including projected assumptions) Table 1 Key Regulatory Ratios (Year on Year, 2017-2021) I. Capital Adequacy Ratio Regulatory requirement - Minimum of 10% II. Fixed Asset Equity Investment to Regulatory Capital Regulatory requirement – Maximum of 25% Regulatory Ratios Table 2 2014 2015 2016 2017 2018 2019 2020 2021 Capital Adequacy Capital Adequacy Ratio 12% 4% 17% 14% 11% 9% 7% 6% Fixed Asset Equity Interest Fixed Asset Equity Investment to primary capital (based on historical sales average of 3 units per month) N/A N/A 60% 67% 71% 68% 62% 54% Fixed Asset Equity Investment to primary capital (based on no property being on the historical sales high of 5 units in a single month) N/A N/A 60% 61% 57% 45% 28% 8% The Bank of Zambia has given the Bank up to 2 years to ensure compliance with the property investment equity threshold of 25% as per Section 75(2) of the Banking and Financial Services Act (“BFSA”). Based on the information shared at the Extraordinary General Meeting of 29 December 2016, out of the 421 units available, only 59 had been sold (representing 11.6%) over a three-year period. Given the Investment Property sales rate assumptions presented in Table 2 above and the profit projections in figure 1 below, the Bank is unlikely to comply with Section 75(2) of the BFSA if business continues as usual and in the absence of another substantial cash capital injection. As evidenced in the analysis above, the Sub-Committee is of the belief that for the Bank to be profitable, fundamental and significant changes need to be made in order to effectively turn the Bank around. Historical Financials and Projections for Investrust Bank Plc Fig. 1: Statement of Profit or Loss and Other Comprehensive Income Fig 2: Statement of Financial Position Balance Sheet Drivers - Customer deposits form the major basis for key driver assumptions in the balance sheet. Projected loans and advances are computed based on historical average Loan to Deposit Ratio (LDR). - Held to Maturity Investments/Investments in Securities, Cash balances projection assumptions are based on historical ratios of Investments in Securities and Cash balances to Customer deposits respectively. - Other Borrowed Funds assumptions are based on the historical average ratio to Marketable Securities and Cash balances. - The Shareholder Equity takes into account the dividend payments to Meanwood of ZMW 6,000,000 per annum. Assumptions - Customer deposits are assumed to increase by 10% per annum over from 2016 to 2021. - Other key assumptions are highlighted, italicized and in red-text below the respective line item. - Interest expenses as a percentage of interest bearing assets are adjusted downward year on year by one percentage point, in line with the recent indications of the Central Bank easing Monetary policy. The sustainable interest expense to interest bearing assets ratio from 2019 to 2021, is assumed to remain above the previous 5-year high of 7% at 8%. 3. ASSESSMENT OF CAPITAL STRUCTURE Preference Shares The recently issued preference shares offered the Bank temporary relief in terms of meeting the minimum regulatory capital requirements. The Sub-Committee was mindful of the implications of the terms of the Subscription Agreement with regards to: a. The nominal value of the preference shares for which the coupon interest is charged – the Bank of Zambia as a prerequisite to approving the Preference Share Issuance prescribed that the Bank was to issue the preference shares at 85% of the value of the non-cash consideration (i.e. Investment Properties and a Mortgage portfolio valued at ZMW 100.1 million), which is what is recognized in the Bank’s books. The Subscription Agreement, which outlines the key terms and provides the legal basis for which the preference share issuance was undertaken, still makes reference to a subscription amount of ZMW 100.1 million. It was the opinion of the Sub-Committee that the 6% coupon rate should be charged on ZMW 85 million (i.e. 85% of the determined value at the time of the investment). b. The Balance Sheet at 28 February 2017 discloses the preference share capital as ZMW 20,025, with practically most of the value of the subscription being recognized as share premium. This application is contrary to the provisions of the Subscription Agreement that assigns a par value of ZMW 5,000 per share without a premium. Bank of Zambia Emergency Liquidity Assistance Loan Facility Post the Preferential Share Issuance the Bank was immediately compliant with the minimum capital requirement. However, the Sub-Committee was cognizant of the fact that the Preference Share Issuance did not inherently generate liquidity for the bank, at least not immediately, but allowed the Bank to access liquidity via a credit line from BoZ in the form of the Emergency Liquidity Assistance (“ELA”) Loan Facility. The Bank had access to a total amount of ZMW 150 million, however, settled for ZMW 137.5 million. A summary of the terms of the ELA were as follows (see Annexure 9): a. Collateral value of ZMW 310.9 million over the Bank’s current and performing Loan Book which is fully protected by the credit worth and paying capacity of the underlying borrowers or the underlying collateral pledged; b. 26.5% interest charged on funds accessed; c. Tenor of 180 days; and d. Monthly collateral valuation. The Sub-Committee’s key concerns regarding this facility were the bank’s ability to meet its settlement obligation in the next 90 days (90 days had already elapsed at the time of writing this Report) based on the Sub-Committee’s observation of the Bank’s solvency position (see Section 2 of this paper) and the availability of the required collateral at the required quality and standard. The Sub-Committee opines that the request by Investrust to draw down ZMW 137.5 million instead of the initially offered ZMW 150 million was influenced by the Bank not having sufficient collateral to provide for a ZMW 150 million facility – this places doubt on the quality of the loan book. The Sub-Committee requested for the current loan book provided as security from the Bank via Management to substantiate its views, however, the Bank has not provided this information as at the time of the completion of this paper. 4. POTENTIAL BENEFITS AND CHALLENGES OF HOLDING OF THE INVESTRUST INVESTMENT. The key investor attractions and challenges as outlined below were identified by the Sub-Committee: Key Attractions • Publicly Listed company. • Local Bank i. Key decisions are made locally hence quick turnaround time. ii. The Bank may also benefit from pro-government policy. The Bank has in the past benefited from deposits from government institutions and agencies. • Extensive branch and agency network – Although, the Sub-Committee believes this is an area in which the Bank may benefit from increasing banking penetration. However, to date the Bank’s business model has not been able to fully monetize its branch network. • Dividend prospects and capital appreciation – commercial banks are innately expected to pay-out most of their earnings as their growth is seldom driven by investment in brick and mortar. Challenges • Capital Adequacy – In spite of the recent capital injection into the Bank, there has been consistent failure to preserve the Bank’s capital by generating profits. Maintaining the (operational) status quo has and remains a major threat to the Bank. • Weak information flow between Management of ZCCM-IH and the Representative Directors nominated by ZCCM-IH. • In the current state of the Bank, it is unlikely that ZCCM-IH will receive a dividend in the medium to long term nor will it be able to dispose of its interest for capital gain. No reliance can be placed on the business plan submitted by the Bank. • Potential governance challenges between the major shareholders during the transition period. 5. KEY RISK ANALYSIS The Sub-Committee categorized the risks of the investment in Investrust as follows: I. Legal and Compliance Risks – Litigation claims against the Bank, could potentially impact the Bank financially and lead to breach of regulatory provisions; II. Financial Risks – Questionable profit potential of the Bank and its apparent inability to raise additional capital. This has a significant bearing on Capital Adequacy and equity interest composition (primarily fixed assets) and the possibility of the Bank being liquidated in the near future; III. Market Risks – The growing competitive landscape of the banking sector; IV. Operational Risks – Internal control, systems and processes; V. Other Risks – Include the impact of the convertibility of the Preference Shares issued in December 2016. Legal Risks a. Share Sale and Purchase Agreement (SSPA) – Currently under this agreement, ZCCM-IH was obligated to sell 10.5% of its shares to MVC, while MVC was obligated to buy the shares from ZCCM-IH by the 20th of March 2017. As at the 30th of March 2017, MVC had failed to honour its obligation. In view of this outcome, legal advice should be sought to determine the extent of each party’s obligations, if any, under the SSPA. Further, the SSPA provided that upon completion of the sale of the shares to MVC, ZCCM-IH was required to sell down further to a level of 25% shareholding in Investrust or less. As in the paragraph above, legal advice needs to be sought. In the event that the sale of the shares to MVC was to proceed, notwithstanding the outcome referred to above, MVC would potentially end up with a shareholding of 28% in Investrust. This level of shareholding would under the Banking and Financial Services Act (the “Act”), require MVC to obtain Bank of Zambia approval. It is worth noting that this a condition precedent included in the SSPA. The following risks where identified: Risk: MVC’s failure to purchase the shares as reported above may result in ZCCM-IH failing to meet the requirements stipulated in the waiver by 21 October 2017. Given that the spirit in which the agreement was made was such that ZCCM-IH may fall below the 35% shareholding threshold to avoid a Mandatory Offer, pursuant to the Securities Act CAP 354 of the Laws of Zambia -1993 (this requirement was subsequently waived by the Securities Exchange Commission (the “SEC”) only up to 21 October 2017). Mitigation: The SSPA Agreement allows ZCCM-IH to claim for specific performance and interest in the Courts of law. ZCCM-IH may also cede its’ Rights and Obligations to a third party. The Sub-Committee opines that ZCCM-IH should consider a possible transfer of shares to the Industrial Development Corporation together with any attendant Rights and Obligations. More so, the SEC provides leeway to apply for a further waiver. In addition, the Sub-Committee would also like to establish the implications of the (new) Securities Act of 2016 (repealing and replacing the Securities Act Cap 354 of 1993) which exempts holding companies from the provisions of Part XI: Mergers and Take-Overs within the Act, to any such application for a waiver. It may also be important to note that a breach by MVC gives ZCCM-IH the opportunity and the leverage to broker a deal with other potential partners who can add value to the Bank. Other inherent risks I. Failure by MVC to meet condition precedent to acquire BoZ approval. This condition arises in the event that MVC exceeds the 25% shareholding threshold. However, in the absence of approval, ZCCM-IH shall only be obliged to sell shares to MVC such that MVC remains at 25%. MVC may also opt to hive off 3% shareholding in Investrust in advance of the final trade with ZCCM-IH, such that the transfer of the 10.5% shareholding to MVC would result in MVC holding 25% shareholding in the Bank. II. ZCCM-IH fails to sell down to 25% shareholding in the Bank, assuming the (primary) transaction governed by the SSPA is successfully completed. b. Litigation claims against and in favour of Investrust According to the Circular to Shareholders issued on 2 December 2016 (Annexure 1), Investrust has exposure to over ZMW 17 million in legal claims against it (15% of the Bank’s Market Capitalisation). The major claims are those instituted by Chickmasters Limited regarding an alleged wrongful execution of a mortgage and MTN Zambia Limited regarding a guarantee issued on behalf of Celpay Zambia Limited for ZMW 11,000,000 and ZMW5,000,000 respectively. Though the Sub-Committee is yet to receive further information regarding the above claims, it is noted that if the claims were lost, the Bank would suffer knock on consequences of a financial and reputational nature. A legal opinion as to the likelihood of Investrust having substantial defense against these claims is being pursued. Claims in favour of the Bank have not been disclosed in any formal documentation provided to ZCCM-IH, however, there has been word, though yet to be fully substantiated, that Investrust has made claims against The Post Newspaper and Lamasat International Zambia Limited on funds owing to the Bank. The amounts owing and the true nature of these claims is yet to be substantiated by the Sub-Committee. Not barring the aforementioned, timing is of the essence and therefore regardless of the outcome of these cases, the Bank’s immediate risks lie outside of these matters. The Bank needs to be recapitalized with patient capital invested to support a well thought through survival and growth strategy. Financial Risks With reference to the financial analyses in Section 2 of this paper, the following risks become apparent: Risk 1: Erosion of capital (to below the minimum regulatory requirements) within the next year) – in the absence of further capital injection. Risk 2: Subsequent, non-compliance of the fixed asset equity interest within the two-year grace period granted by Bank of Zambia. Risk 3: Lack of satisfactory solvency – the Bank remains in critical need of liquidity. Risk 4: Impact of the legal claims outlined in Section 3, Part b. under Legal Risks amounting to over ZMW 17 million. By maintaining the status quo there is a high likelihood that the Bank’s capital adequacy will fall below the prescribed threshold, subsequently posing a threat to the Bank’s going concern. More so, the provision for the litigation claims paints an increasingly dim picture. The Sub-Committee also cites key critical operational flaws from the Audit Management Letter for 2015 (Annexure 11), as outlined under Operating Risks below, which directly and unavoidably impact on the financial performance of the Bank. The likelihood of Risk 2 above occurring is to an extent increased by the fact that Investrust proceeded to sell its subsidiary Zambia Home Loans Limited (“ZHL”), which could have been a suitable vehicle in selling the property equity interest acquired from the issuance of the Preference Shares. The Sub-Committee was of the view that this transaction is likely to undermine the Bank’s ability to systematically convert the property interest into cash. The Sub-Committee seeks counsel from the ICB as to whether this sale should be allowed to proceed unchallenged. Operational Risks The Audit Management Letter for 2015 (Annexure 11) revealed critical and substantial flaws in the Bank operations. The Sub-Committee noted the following shortcomings in the Bank’s systems and processes: a. Ineffective underwriting and management loan facilities – issuance of loans without sufficient or quality collateral to reduce financial loss in the event of non-performance; b. Absence of a credit impairment model consistent with the International Financial Reporting Standards (“IFRS”); c. Non suspension of interest for some non-performing loans as prescribed by regulation; d. Non-compliance to BoZ prudential reporting requirements regarding valuation of collateral; e. Inadequate monitoring of transaction settlements; f. Overdrawn accounts which do not have overdraft facilities; and g. Approximately ZMW 23 million in loans advanced to shareholders that are non-performing. The Sub-Committee was of the view that the above outlined deficiencies are in key areas that a fundamental to the proper running of a banking institution. The fact that these issues were brought forward as significant deficiencies by the auditor is of great concern. The Sub-Committee opine that these deficiencies are at the spine of the Bank’s poor financial performance. In the absence of the Audit Management Letter for 2016, the Sub-Committee was unable to review the current status of the above shortcomings. Nonetheless, the information gathered from the Audit Management Letter for 2015, has been critical in obtaining key insights into significant operational flaws which have in the past negatively impacted the Bank’s performance and are likely to impact future performance if they remain unaddressed. Market Risks The Sub-Committee is fully aware of the tight liquidity conditions that have characterized the banking sector. The larger banks having a larger capital base and access to myriad of funding options more so from their parent institutions. Further competition has been evident from non-banking institutions as well, who have increasingly offered competitive rates for funds deposited. With the homogeneity of products offered across banks more especially in the retail space, effective and quality service delivery in this area increasingly becomes important; the key differentiating factor. Investrust, given its extensive branch network, has been unable to effectively monetize this network, with the Bank’s market share by customer deposits dropping from 4.20% in 2012 to 2.00% in 2016. The failure of the Bank to effectively grow its retail customer base in a cutthroat business environment presents a significant risk. Other Risks – Implications of the Convertibility Clause. The convertibility clause under Section 2.3 of the Circular to Shareholders (Annexure 6), which defines the trigger for the conversion of the preference shares to ordinary shares is the dilution of the Preference Shareholders’ current ordinary shareholding appear to be flawed at Law. The Sub-Committee is of the view that the convertibility of the preference shares into ordinary shares should not and cannot be permitted because Meanwood Financial Services Limited’s (“MFS”) is not currently a voting shareholder holding ordinary shares. The fact that there exists nested shareholding interest in the Meanwood Group of Companies does not, and should not, legally speaking give rise to such a conversion, see Figure 3 below (extracted from the Circular to Shareholders). Further legal advice is required. Fig. 3 Risk: Convertibility may to an extent influence the resulting shareholding structure of a merger or takeover – as it is triggered by any form of dilution. This may potentially be a deal-breaker for a potential acquirer. Nonetheless, the Sub-Committee is yet to review the Subscription Agreement which is the governing legal document for the preference share issuance, to have a clear understanding of what may prompt convertibility. Identified Risks Register – In summary Category Risk (Description) Severity Likelihood of occurrence Legal Non-performance on SSPA. Low Medium High Low Medium High Legal Failure by MVC to meet conditions precedent. Low Medium High Low Medium High Legal ZCCM-IH failure to sell down to 25%. Low Medium High Low Medium High Financial Litigation claims against the Bank Low Medium High Low Medium High Financial Capital deficiency Low Medium High Low Medium High Financial/ Solvency Technical insolvency Low Medium High Low Medium High Financial/ Regulatory Compliance Fixed asset equity interest – compliance with Section 75(2) of the BFSA within 2 years Low Medium High Low Medium High Operating Lack of internal controls Low Medium High Low Medium High Market Loss of market share/ deposit customer base Low Medium High Low Medium High Other Conversion of Preference Shares Low Medium High Low Medium High 6. CONCLUSION & RECOMMENDATION Inherently, ZCCM-IH has the following three options: a. Hold its current position without any intervention with the same personnel running the bank. Pros: • ZCCM-IH can actively drive strategy being the majority shareholder in the Bank and ensure governance structures and internal systems and processes are at par, as the foundation for effective turnaround. Cons: • Highly unlikely that the current Management would be able to successfully roll-out the prescribed turnaround strategy given the historical track record; • ZCCM-IH may potentially lose its entire investment by wholly or partially maintaining the status quo. This would result in ZCCM-IH making an impairment in its books; and • ZCCM-IH does not have the requisite capacity nor experience to operate a bank. b. Hold its position, however, while introducing external intervention i.e. additional equity capital injection and a new operator. ZCCM-IH would identify a strategic partner who can provide both capital and operating expertise. An amalgamation of the Bank with another or other smaller local banks with which the Bank may acquire synergetic benefits should also be considered under this option. Pros: • This strengthens the Bank’s Balance Sheet and ensures the operating structure of the Bank is for the most part recast. • Provide the Bank with a fresh brand – which would assist to eliminate legacy issues that may have overshadowed the Bank’s potential. • ZCCM-IH may salvage the value lost in prior years from its investment. Cons: • ZCCM-IH may lose a significant part of its stake and influence; • A foreign strategic partner may require management control or a controlling stake which would mean the bank moves from being a local to a foreign bank. c. Not hold – exit the investment This option would involve ZCCM-IH selling off its stake in the Bank to an external party or to any of the current shareholders at a desirable price. Ideally, ZCCM-IH would at least need to recoup its entire investment at par or its initial investment amount. In this regard, ZCCM-IH may also explore further the possibility of a corporate action in which ZCCM-IH’s investment in the Bank could be restructured through the transfer of shares to IDC. Pros: • ZCCM-IH minimizes or eliminates any further losses in holding the investment and deploy salvaged funds in the next best investment opportunity; • May offer at least some value, however low, compared to an absolute loss that is likely imminent under option a. above. Cons: • Given the lack of liquidity on the market and the historically adverse performance, its highly likely that the equity stake could be sold at a much lower than desirable price; From the information that has been gathered by the Sub-Committee and the risks outlined, it becomes more clear that the Bank is in need of a progressive and patient capital injection, however, a fundamental change in the operating model, which may ultimately entail a complete overhaul of Management and review of the entire corporate governance structure. It is the view of the Sub-Committee that maintaining the status quo will not improve the Bank’s current situation and may increase the risk of ZCCM-IH losing its investment. It is of the Sub-Committee’s view that ZCCM-IH may only salvage value if it brings on-board an operating partner who will subsequently inject capital into the bank and substantially restructure the Bank’s operating structure. In the absence of any such partner, a case for ZCCM-IH to exit the investment becomes more compelling. However, the latter would entail ZCCM-IH may need to stomach a substantial discount on the share price. In light of the above, the Sub-Committee recommends Option b. for the ICB’s consideration. In making this recommendation, the Sub-Committee has taken a balanced view of all the factors at play including national and wider stakeholder interests. The Sub-Committee is at the same time mindful of the need to; minimise the Company’s exposure to risk, protect its investment, promote growth and stability of the Bank as well as the financial sector in general. Option b. would entail that ZCCM-IH urgently proceeds with the following steps: i. Immediately engage the Bank of Zambia and the major shareholders including the pension funds, with the view of working out a joint strategy for the survival of the Bank; ii. Scan the market for local and international parties that could potentially be interested in investing in the Bank; and iii. Consider conducting a joint due diligence assignment with prospecting strategic partner. Such process would enable ZCCM-IH to leverage off the expertise of the partner and help develop a survival plan for the Bank. 7. ANNEXURE LIST Annexure 1: The Securities Act No. 41 of 2016 (extract - Part XI); Annexure 2: The Lusaka Securities Exchange Listing Requirements (extract– Sections 5.9 - 5.35, 16.14 -16.15); Annexure 3: The Banking and Financial Services Act (extract – Section 75(2)); Annexure 4: The Rights Offer Underwriting Agreement between ZCCM-IH and Investrust; Annexure 5: The Share Sale and Purchase Agreement between ZCCM-IH and MVC; Annexure 6: Circular to Shareholders for the Preference Share Issuance of December 2016 (extracts – pages 11-12, 21, 47-48); Annexure 7: Subscription Agreement between Meanwood Financial Services Limited (“MFS”) and Investrust in respect of the Preference Share Issuance of December 2016; Annexure 8: The Investrust Corporate/Strategic Plan; Annexure 9: The Terms of the Bank of Zambia (“BoZ”) Emergency Liquidity Assistance (“ELA”) Loan Facility granted to Investrust; Annexure 10: Management Accounts for 2016 and Year-to-date February 2017; Annexure 11: Audit Management Letter for 2015; Annexure 12: Minutes of the meetings held by the Sub-Committee.