EABL seeks Sh5.4 billion to ease overdraft loans burden

Beer maker EABL is set to raise Sh5.4 billion in cash through commercial papers to ease the finance costs for its bank loans and overdrafts.

The company has been feeling the weight of high financing costs having borrowed a five-year Sh19.5 billion loan from its parent company Diageo , which was used to buy back from SABMiller its 20 per cent stake in Kenya Breweries Limited.

The brewer will be banking on its growth prospects to market the commercial papers to potential buyers at possibly lower costs.

“The proceeds will be used for East African Breweries Limited’s general corporate purposes, including working capital, capital expenditure and refinancing more expensive short-term loans and overdrafts,” said the brewer in a statement.

A commercial paper is a short-term, unsecured instrument payable within a year that is similar to, but ordinarily cheaper than a bank overdraft.

Analysts at Old Mutual Securities and Standard Investment Bank (SIB) said EABL is seeking to improve its balance sheet by paying down expensive debt and replacing it with cheaper ones even as it seeks to grow its market share.

“The key focus will be on strengthening the balance sheet by reducing the debt because the company’s cash pile will be improving going forward,” said Eric Munywoki, a research analyst at Old Mutual Securities.

The new issue will be priced on the basis of the Treasury bill rates at a negotiated maturity period. The 91-day T-bill rate was at 9.2 per cent as at the auction for January 16.

Mr Munywoki said the paper is likely to be priced at a small margin above the 364-day T-bill.

“It is likely to be at a small margin, very small indeed. So it will basically be like the T-bill rates,” said Mr Munywoki.

The one-year T-bill rate was 10.7 per cent in the auction of January 22, showing that it was 1.5 percentage points higher than the 91-day T-bill.

Only select high net-worth individuals and investment institutions such as fund managers, pension and provident fund administrators and stockbrokers would be eligible for the issue, EABL said in the notice.

EABL’s share price-to-earnings (P/E) ratio stands at 32, nearly double the market P/E of about 17.

“While we believe in the long-term growth plans for the brewer, we still feel that the brewer is overvalued at the current share price and see a downside of at least 20 per cent despite coming off from a high of Sh400,” said SIB in a note to investors.