Published on Tuesday, November 20, 2018 at 9:54, this report shows how Kenyan banks were increasingly refusing to roll over debt for struggling companies, leaving some to seek administration or shareholder rescue.
The pressure has sharpened since the lending rate cap took effect, because banks now see less upside in extending fresh credit to firms already under strain. With the maximum lending rate at 13 per cent, some lenders say government securities now offer a safer return than financing risky borrowers.
Fashion retailer Deacons East Africa became the latest casualty after it moved into administration under PKF Consulting when it failed to settle its debt. The company joined ARM Cement, which was in its third month under the care of PricewaterhouseCoopers (PwC).
Lenders to Mumias Sugar Company also recalled their loans in 2017, although the miller had not updated investors on the dispute. Atul Shah, the founder of Nakumatt Holdings, which entered voluntary administration early in 2018, had earlier argued that the rate caps broke the business model of debt-heavy retailers.
“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 the problem is not only the cap itself but also the stricter lending environment that followed. Under International Financial Reporting Standard 9, lenders must make immediate provisions when a borrower shows financial distress, which has made them more conservative about refinancing weak firms.
“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.
Deacons had Sh351.6 million in loans maturing in 2018, even as sales kept falling and losses widened because of factors including the loss of franchises. The company had earlier said its board was pursuing a mid-term turnaround plan backed by major shareholders, but that support did not materialise in time.
“Consequently, the board has launched a mid-term turnaround strategy geared to advancing the group’s performance,” Deacons said in its half-year results for the period 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 retailer’s creditors included NIC Bank, owed Sh524.8 million, and UBA Kenya Bank Limited, owed Sh98.3 million as of December 2017. Years of losses had reduced Deacons’ book value to Sh101.4 million by June 2018, almost wiping out the value of shareholders who had paper wealth of Sh1.8 billion when the company listed on the Nairobi Securities Exchange (NSE) in August 2016 at Sh15 per share.
By Friday, the stock had lost 97 per cent of its market capitalisation and was trading at Sh0.45. Private equity firm Aureos, which held a 5.53 per cent stake, was among the biggest losers. Centum Investment tried to buy the stake last year but later abandoned the deal without explanation.
The credit squeeze has also forced some companies to lean on shareholders. TransCentury received a Sh388 million loan in 2017 from its controlling shareholder, Kuramo Capital, while the government last year guaranteed Sh4.3 billion in new loans from eight local banks, including KCB, to Kenya Airways after the airline defaulted on earlier facilities.
For companies such as Nakumatt, ARM and Deacons, shareholders were either unable or unwilling to inject more capital, and that left administration as the only option.
