President Uhuru Kenyatta sips beer during the groundbreaking ceremony of the Sh1.5 billion EABL plant in Kisumu mid last month. FILE PHOTO | ONDARI OGEGA | NMG
To compensate investors, they have premiumised the coupon by 70 basis points—pricing the bond at 12.95 per cent per annum payable semi-annually.
For EABL, working capital constraints may have faded—and I say so for two reasons.
First, for the first time since 2010, they were able to close fiscal year 2017 with positive unencumbered cash.
Secondly, they significantly brought down short-term liabilities (payables and short term loans).
East African Breweries Limited (EABL) #ticker:EABL recently revised the pricing supplement for the first tranche issue of its Sh11 billion medium term note programme. Cut the jargon. Essentially, they have restructured the bond. And they have done it in a very simple manner—by way of pushing forward the principal redemption date by two years. It was a three-year note issued on March 25, 2015 with a redemption slate of March 19, 2018—raising Sh5 billion in the process.
Redemption has now been rolled over to March 19, 2020. To compensate investors, they have premiumised the coupon by 70 basis points—pricing the bond at 12.95 per cent per annum payable semi-annually. I must say I haven’t seen any member of the so called blue-chip grouping restructure a debt in such a long time.
But I’m also not ringing any alarm bells here. I mean, there could be a myriad of reasons behind any restructure—but usually, liquidity constraint is top of the list. The key to understanding any debt restructuring lies in contextualising the underlying issues.
Well, for EABL, working capital constraints may have faded—and I say so for two reasons: first, for the first time since 2010, they were able to close fiscal year 2017 with positive unencumbered cash and, secondly, they significantly brought down short-term liabilities (payables and short term loans).
Essentially, they seem to be getting very efficient with working capital (and I hope I don’t speak too soon on this one). However, the continued balance sheet congestion may have played a big part in the restructure. The first congestion point is debts—and the annual debt servicing sums are staggering. In fiscal year 2016, they had to part with Sh16 billion from their cash flows in debt repayments (interest plus principal). This year, the interest component alone stood at Sh3.3 billion; they are yet to disclose the principal bit.
Beyond debt servicing, they’ve just announced the retooling of the Kisumu kegging plant with a capex commitment of Sh15 billion—which looks likely to be funded via debt. Leverage is not that bad, anyway. Receivables have also continued to build up.
Further, they still have to deal with the mismatch between capex maturity and maturity of debt liabilities used to fund the capex. They also have extreme operational issues to handle. With continued emphasis towards low-margin products, the product mix isn’t optimal.
For instance, the retooling of Kisumu kegging plant may serve to entrench product mix de-optimisation, for the simple reason that keg products are low-margin-unless they secure long-term tax concessions.
Secondly, the issue of concessions to Ugandan distributors still hangs around.
Thirdly, the Tanzanian business is yet to return capital, plus other regulatory issues. Don’t forget South Sudan.
For me (and for you the investor), the debt rollover may not necessarily signal a potential liquidity issue for EABL, but epitomises the company’s inability to decongest its balance sheet and effectively ring-fence its income statement from the biting operational issues.
There is a risk that continued domiciliation of the two variables in the company’s business could still trigger more balance sheet restructurings in the short and medium term.
