EABL Group managing director and CEO Charles Ireland during the interview at his Ruaraka office in Nairobi on September 9, 2013. Photo/DIANA NGILA
What you need to know:
The brewer is seeking more favourable terms on a five-year loan that has seen it pay an interest rate of more than 12 per cent.
EABL is exploring using a mix of fixed and variable interest rate repayments in the negotiations that are expected to be finalised by year-end.
East African Breweries Limited is renegotiating the terms of a Sh19.9 billion loan that has contributed to a sharp increase in its finance costs and reduction in profit.
The firm’s CEO, Charles Ireland, told the Business Daily that the brewer is seeking more favourable terms on a five-year loan that has seen it pay an interest rate of more than 12 per cent.
EABL’s earnings have in the past two years taken a hit on account of the November 2011 credit by its UK parent firm Diageo, to buy back the 20 per cent stake in its Kenyan unit earlier sold to rival SAB Miller.
Diageo advanced the loan to EABL pegging the interest rate payments on Kenya’s 364-day Treasury bill plus 1.5 per cent premium.
“We have a team working to negotiate a review of the loan agreement,” Mr Ireland said.
He added that EABL is exploring using a mix of fixed and variable interest rate repayments in the negotiations that are expected to be finalised by year-end.
Review of the loan term comes at a time interest on the latest 364-day paper issued on September 6 dropped marginally to 11.4 per cent compared to 11.6 issued on August 30.
The interest rate is, however, higher than the low of 8.3 per cent on a similar security issued on June 28.
As of June, the outstanding long-term loan had reduced marginally to Sh19.8 billion and it remains to be seen what concessions the brewer can secure from Diageo in terms of interest repayments.
EABL’s net finance costs jumped 15 per cent to Sh3.8 billion in the year ended June compared to Sh3.3 billion the year before, driven by the Diageo loan and a sharp rise in short-term borrowings. The firm’s bank overdrafts increased 428 per cent to Sh6.2 billion from Sh1.1 billion in the same period.
The sales came after Diageo and SABMiller ended their uneasy alliance, kicking EABL out of Tanzania and SABMiller from Kenya operations, in a deal that has seen EABL recapture full earnings from its Kenyan unit.
Analysts at Old Mutual Securities say the high finance costs will continue to affect the company’s profitability and dividend payouts in the medium term.
The company declared a total dividend of Sh5.5 per share for the year ended June, down from Sh8.75 last year. Its share price has remained unchanged at Sh296 over the past six months.
EABL’s short-term debts went to support the firm’s daily operations besides a number of capital expenditures such as the establishment of a new glass bottling plant at its Nairobi plant.
Mr Ireland said that the brewer would spend another Sh6 billion in the current financial year to boost its production and introduce new brands in the beer market.
EABL also plans to build a multi-million shilling thermal power-generator at its Nairobi plant to hedge against production interruption brought by power outages. The investments will be funded through a mix of debt and cash from operations.
“We are developing a number of products around our popular brands like Tusker, Serengeti, Waragi, and Bell,” Mr Ireland said.
He added that the firm is also expanding its presence in the regional markets to reduce its reliance on Kenya which is seen as a mature beer market. EABL recently setup a depot in South Sudan to make it easier to distribute its products in that market whose traders have previously sourced products directly from Kenya.
Kenya generates about 67 per cent of the firm’s sales, making it the single-largest market ahead of Uganda, Tanzania and other regional economies.
Growth in the Kenyan market is seen as residing in premium whisky and beer brands consumed by the rising middle class.
