TransCentury now gets fresh proposal to pay Sh8bn debt

Bondholders claiming Sh8 billion from investment firm TransCentury have laid down a new set of demands that, if accepted, will see them get Sh4 billion in cash by March 25 and gain control of the company by 2017.

A letter written by Farallon Capital Europe LLP and South Africa-based Investec Asset Management Ltd to a select group of TransCentury’s founder shareholders proposes the means by which the Nairobi Securities Exchange-listed firm could settle the balance of Sh4 billion beyond the March 25 deadline.

Upon receipt of the initial sum in cash, the bondholders want the redemption date to be extended by one year to March 2017, according to the letter sent to Eddy Njoroge, Jimnah Mbaru and the estate of the late James Gachui — the founder chairman.

Thereafter, the creditors propose that TransCentury undertakes a rights issue whose proceeds will be used to settle the outstanding debt.

Under the arrangement, the same bondholders will underwrite the cash call, meaning they will be in a position to assume majority control of TransCentury should its current shareholders prove incapable of paying the final balance for any reason.

Trading in the shares of TransCentury Limited and TransCentury Mauritius Holdings, the subsidiary that issued the bond in Mauritius, will be suspended during the cash call.

The structure of the offer underscores the plight of the listed firm, which some analysts said left it with little options for settling the debt without resulting in a takeover by the bondholders.

It remains to be seen whether TransCentury will find the Sh4 billion that the bondholders have proposed to be paid in 10 days’ time – having recently dropped a bid to raise more than Sh8 billion in a rights issue.

That leaves the company with the option of raising funds from new debt and/or equity sources.

Cede stake

TransCentury yesterday said it had entered into an agreement with Kuramo Capital, an Africa focused investment manager, to inject $20 million (Sh2 billion) as part of an ongoing fundraising effort.

“This investment by the strategic investor will complement other funding options to settle the outstanding convertible bond and fund other infrastructure projects,” the company said in a press statement.

This means the investment firm has to cede a sizeable stake to Kuramo in exchange for the Sh2 billion investment.

Other potential providers of such new funds are likely to balk at the fact that TransCentury’s assets are insufficient to cover existing claims, including those by the bondholders.

TransCentury reported net assets of about Sh3.6 billion as of June 2015, according to the latest disclosures.

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At the Nairobi bourse, TransCentury is valued at Sh1.6 billion, having lost 88 per cent of its value since its listing by introduction in July 2011.

The Sh8 billion owed to the bondholders rises to Sh10 billion on account of a recent weakening of the shilling against the dollar, the currency in which TransCentury contracted the bond.

The bondholders’ decision to aim for a Sh4 billion compensation through a controlling stake in TransCentury reveals the confidence they have that the company’s assets can yield at least that amount in the medium to long term.

Once in control, the creditors-turned-shareholders will have the power to make critical decisions about TransCentury’s ongoing operations, including a possible sale of some assets.

Power cables manufacturer East African Cables is one of the most important subsidiaries of the group with a net worth of Sh2.4 billion as of December 2014.

With three manufacturing plants in East Africa, it has increased its annual copper production capacity from 350 tonnes to 750 tonnes over the last two years.

The Arusha-based Tenelec, the largest manufacturer of transformers in East Africa, has also increased its capacity from 2,000 tonnes to 10,000 tonnes in two years.

Civicon, the engineering subsidiary, has five fully equipped workshops across East Africa and 800 heavy machines, making it one of the leading mechanical engineering, logistics and contracting firms in the region with a presence in power and mining sectors.

While TransCentury has a formal board of directors as a public company, the creditors presumably chose the addressees because they were the principal shareholders when the company issued the bond in 2011 as a private firm.

It remains to be seen how TransCentury will respond to the bondholders’ proposals given the few days remaining to the March 25 deadline.

TransCentury’s chairman and significant shareholder, Zephania Mbugua, has maintained that the company will meet all its obligations but has not explained how it will go about doing this.

The company listed on the NSE in July 2011 by introduction, a month after issuing the bond, to reap the benefits of the market’s liquidity and price discovery.

By November last year, TranCentury’s top 10 shareholders, including Mr Mbugua, Mr Mbaru and Mr Njoroge had cut their combined stake from the 60 per cent they held prior to listing to 47 per cent.

Mr Mbaru, the investment banker who initially held a 6.24 per cent stake in the firm, has disappeared from its list of top individual owners after trading most of his stake.

The bond, listed on the Stock Exchange of Mauritius, is accruing an annual interest of six per cent and a further six per cent premium is to be paid on the units held to maturity.

This means that the typical bondholder will get a minimum payout representing 133.8 per cent of his original investment.

The challenges faced by TransCentury, the poster child for the power of group investments or chamas, is a testament to the dangers of leverage that is also destroying shareholder wealth at Kenya Airways and Uchumi Supermarkets.