Business News
Banks cut credit lines for struggling businesses
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Market News
Tuesday, November 20, 2018 9:54
By VICTOR JUMA
Kenyan banks are increasingly pulling the plug on financially distressed companies, forcing some of them into administration or taking shareholders’ loans to stay afloat, the latest industry data shows.
The trend got traction especially after the capping of lending rates and the subsequent reluctance by banks to lend to firms with weak financial backbones that have traditionally relied on debt refinancing at high interest rates to remain afloat.
Fashion retailer Deacons East Africa is the latest company to go into administration of PKF Consulting after it failed to pay its debt, joining ARM Cement which is now in the third month under the care of PricewaterhouseCoopers (PwC).
Lenders to Mumias Sugar Company #ticker:MSC also recalled their loans last year but the miller has not updated its investors on the debt standoff.
Atul Shah, the founder of retail chain Nakumatt Holdings, which went into voluntary administration early this year, was the first to disclose how the interest rate caps destroyed the business model of debt-laden firms.
“The Nakumatt engine relied heavily on bank loans to roar on. For a long time, things were fine; we would repay the loans and readily get some more,” Mr Shah said in an earlier interview.
Bankers say that while the capping of lending rates slashed the finance costs of these companies on their pre-existing debt, it has been a stumbling block when they try to get new loans to pay off their maturing liabilities.
This is due to the lending rate, currently at a maximum of 13 per cent, almost converging with returns on safer investments in government bonds and T-bills.
“It is better to buy treasuries than to lend to a riskier borrower for the same period given the prevailing lending rates,” said a bank executive who did not wish to be named.
He added that the adoption of a more conservative accounting system (International Financial Reporting Standard 9) has further seen credit rationed to riskier borrowers.
“Under the current system, a borrower’s financial distress will result in immediate provision for the loan. Previously, we would lengthen the repayment period,” the bank executive said.
Deacons had loans of Sh351.6 million maturing this year at a time when it has continued to register lower sales and larger losses attributable to various factors, including loss of franchises.
The credit crunch has seen other companies get loans from their shareholders. Investment firm TransCentury, for instance, received a Sh388 million loan last year from its controlling shareholder, Kuramo Capital.
The government, the top shareholder in Kenya Airways, last year guaranteed new loans of Sh4.3 billion that eight local banks, including KCB, provided to the airline after it defaulted on earlier facilities.
For companies like Nakumatt, ARM and Deacons, their shareholders were unable or unwilling to commit more capital to the struggling businesses, forcing them into administration.
The fashion retailer had recently indicated that its shareholders were willing to rescue it and it was not immediately clear why the plan failed to materialise.
“Consequently, the board has launched a mid-term turnaround strategy geared to advancing the group’s performance,” Deacons commented on its results for the half year ended June.
“This will be achieved through the restructuring of the capital base of the company with the support of major shareholders in order to grow the Deacons house brand, optimise the company’s successful brands and reduce operational expenditure.”
The fashion retailer’s creditors include NIC Bank and UBA Kenya Bank Limited, owed Sh524.8 million and Sh98.3 million respectively as of December 2017.
Years of losses had reduced Deacons’ book value to Sh101.4 million as of June, nearly wiping out shareholders whose total paper wealth was valued at Sh1.8 billion when the company listed on the Nairobi Securities Exchange (NSE) in August 2016 at a price of Sh15 per share.
Deacons had lost 97 per cent of its market capitalisation by Friday when it traded at Sh0.45.
One of the biggest losers in the company’s collapse is private equity firm Aureos, which had a 5.53 per cent stake.
Centum Investment last year moved to buy the Aureos stake but later backed out of the deal without giving reasons.
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