Details of the bond, including the coupon and whether it will have a fixed or variable rate, are being finalised and will be announced in the coming weeks.
CEO Pradeep Paunrana says he expects cash-rich institutions like pension funds and insurance companies to take the lion’s share of the bond.
Loans used to complete a clinker plant in Tanzania, which stood at over Sh10 billion in June, have raised the company’s finance costs and put pressure on its cash flows due to their short tenor.
NSE-listed cement maker ARM plans to issue a five-year corporate bond next month to raise Sh7 billion that will help to repay its short-term loans.
The company last year took bank overdrafts running into billions of shillings to complete its new clinker plant in Tanga, Tanzania.
The loans, which stood at over Sh10 billion in June, have raised the company’s finance costs and put pressure on its cash flows due to their short tenor.
This is, however, expected to change with the issuance of the bond that will give ARM more time to generate earnings from its new investments, including the Tanga plant.
“We are going to issue a Sh7 billion bond whose proceeds will be used to repay the short term loans,” said Pradeep Paunrana, ARM chief executive.
“We are basically converting the short term loans into five-year debt,” he said, adding that ARM will in the next two years focus on further reducing its overall debts using cash generated from operations.
Details of the bond, including the coupon and whether it will have a fixed or variable rate, are being finalised and will be announced in the coming weeks.
The latest five-year government bond — the comparable benchmark security — was issued at an interest rate of 14.27 per cent. ARM is expected to pay a premium on this rate in line with other corporate bonds that have offered one percentage point or more on treasuries to attract investors.
Mr Paunrana said he expects cash-rich institutions like pension funds and insurance companies to take the lion’s share of the bond.
“The strategy is to consolidate the debt into one price,” said John Ngumi, who recently left his position as investment banker at CfC Stanbic where he was involved in structuring ARM’s upcoming bond.
Mr Ngumi said ARM’s new investments in clinker plants will lead to lower costs, ultimately making it easier to repay its debts.
Mr Paunrana said he expects Lagos-based Africa Finance Corporation (AFC) — one of ARM’s major lenders — to go for shares instead of cash on or before its loan matures in September 2018.
Such a move will save ARM the cash it would otherwise need to repay the $50 million (Sh5 billion) principal.
AFC has the option to convert the loan — which has increased to $52.9 million (Sh5.3 billion) due to accrued interest — to a maximum 13.6 per cent stake in ARM.
ARM’s share price has, however, declined to trade below the conversion target of $0.64 (Sh64.4) in the past few weeks, closing at an average of Sh61.5 Tuesday.
The stock has fallen 28 per cent since the beginning of the year, having touched highs of Sh92 in February.
“We have three years to go (before the AFC loan is due). The share price will have recovered,” said Mr Paunrana, adding that the firm’s earnings before interest, tax and depreciation is projected to reach Sh5.5 billion in 2016.
The company, however, made a net loss of Sh355.8 million in the half year ended June largely due to higher finance costs and provisions for forex losses, reversing the net profit of Sh847.2 million a year earlier.
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