ARM debt to Nigerian financier hits Sh5.3bn on weak shilling

Cement maker ARM’s debt to Lagos-based Africa Finance Corporation (AFC) has soared to Sh5.3 billion ($52.9 million) or 5.8 per cent more than the original amount of $50 million (Sh5 billion) the company borrowed in 2012.

The rise is mainly due to a weakening of the shilling and the Kenyan firm’s deferment of interest payments on the loan.

The shilling has depreciated to 101 units to the dollar currently compared to 83 units when the loan was taken, resulting in potential forex losses of about Sh900 million.

Besides raising ARM’s debt burden, the increase in the convertible loan means AFC could potentially take a bigger stake in the cement manufacturer if it opts to go for shares instead of being repaid in cash.

The NSE-listed firm offered updates on the AFC loan in its latest annual report, noting that the amount has been rising due to deferment of interest payments.

“The company capitalised interest amounting to $1.3 million being total interest charged in the year which brought the total amount owed to AFC to $52.9 million,” said ARM in the report.

The debt had risen to $51.6 million (Sh5.2 billion) last year following a similar move to postpone interest payment, freeing up cash for other uses in the short term.

Analysts say capitalisation of interest means the loan agreement allows for payment of both principal and accrued interest at the end or is a signal that the borrower is not able to pay the interest as they fall due.

READ: Nigeria bank joins ARM board, eyes 13.6pc stake

“Either the loan terms allow for a balloon payment or the borrower is having some difficulty,” said RSM Ashvir consultancy partner Ashif Kassam, who was not, however, commenting specifically on the ARM loan.

ARM chief executive Pradeep Paunrana could not be reached for comment as his mobile phone was switched off.

AFC has the option to convert the debt into ARM’s shares at any time before September 2018 but the cement firm’s share price has dropped to levels that are currently below the pre-set debt conversion price.

The ARM loan is redeemable at a premium of 10 per cent. AFC also has the option of converting the debt into new ordinary shares of the cement firm at a fixed rate of $0.64 (Sh64.4) per share.

ARM’s share price has, however, dropped to below the conversion level in the past few weeks, closing at Sh61.5 Monday. The stock has fallen 28 per cent since the beginning of the year, having touched highs of Sh92 in February.

A fresh rally in the share price could offer AFC another opportunity to convert its loan at a discount that enhances returns.

At a target price of Sh64.4, AFC could take 82.9 million shares equivalent to a 16.7 per cent stake in ARM if it opts to convert the debt currently standing at Sh5.3 billion.

This is up from 78.4 million shares or a 15.8 per cent stake if the principal had not grown.

While recapitalisation of interest frees up cash in the near term, it will increase the firm’s finance costs in the medium term as the delayed cash payments add to the principal which earns interest quarterly.