KenolKobil paper raises Sh1.7 billion for operations

KenolKobil has raised Sh1.7 billion through the sale of a commercial paper to fund its working.

Kestrel Capital, the short-term paper arranger and placing agent, said that institutional and high-net worth investors bought the commercial paper that went on sale through a private placement between late July and September.

“The commercial paper has been successfully and fully privately placed with qualified investors, earning a significant premium over government Treasury bill yields,” Kestrel Capital chief executive Andre DeSimone told Business Daily.

The commercial programme is not a one-off but continuous and tailored to the company’s working capital needs. KenolKobil cash needs have been increasing over the past five years in tandem with rising sales.

Between 2012 and 2009 the regional marketer’s sales nearly doubled to Sh192.5 billion from Sh96.7 billion. They later touched Sh222.4 billion in 2011. Working capital slightly more than doubled to Sh12.9 billion from Sh6.2 billion over the same time.

Locking cash in inventory puts a strain on working capital, which results in increased overdraft to finance operations, a more expensive financing method especially when interest rates are high.

Analysts expect Sh1.7 billion raised to increase KenolKobil’s operational liquidity.

Eric Munywoki, a research analyst at Old Mutual Securities, said that the funds from the commercial paper will free up cash, which would have been locked in stocks, making it necessary to borrow more for day to day operations.

“They need to have cash to pay for costs tied to operations such as lease payments on the trucks transporting fuel,” said Mr Munywoki.

A note by Standard Investment Bank on Kenya’s oil and gas sector says the oil companies’ better management of working capital is expected to see a return to profitability from losses partly attributable to high borrowing costs.

KenolKobil has had a rough ride in recent months in part attributed to the financing costs.

South African-based firm Global Credit Ratings (GCR) downgraded KenolKobil’s long-term debt rating to A from the 2012 rating of A+ with a negative outlook, citing the company’s rising debt levels arising from high levels of working capital requirements coupled with capital erosion from losses.

Last year it reported a Sh3.9 billion loss. Its competitor Total Kenya made a Sh293 million loss but both have since returned to profitability.

“Our fair value is primarily driven by our expectation of normalisation in margins and more aggressive working capital management,” says the report.

Kestrel Capital did not indicate the rate on the commercial paper but analysts said that while significantly lower than overdraft facilities the rate is in the double digits.

“It has to be or the investor will buy Treasury bills,” said Johnson Nderi, the head of research at Suntra Investment Bank.

Data from the Central Bank of Kenya indicates that the average rate on the 91-day Treasury bill stands at 9.76 per cent while the average lending rate stands at 16.96 per cent, hinting that the rate on Kenol Kobil’s commercial paper is sandwiched between these two rates.