Last week’s sudden resignation of TransCentury’s long-serving chief executive Gachao Kiuna is being seen as the initial consequence of a debt storm that is looming over the company — threatening to wipe out the shareholders’ investment.
Before Dr Kiuna’s exit, the Nairobi Securities Exchange (NSE)-listed firm had been sanguine about the approaching maturity of a Sh8 billion dollar-denominated convertible bond that is due for payment on March 25.
Analysts say it is almost impossible to retire the bond because any plan devised to redeem the debt will result in existing shareholders handing over the company to whoever will provide the funds.
“I struggle to understand how TransCentury, a company whose market capitalisation is Sh2.4 billion, is going to raise Sh8 billion to redeem these deep ‘out of the money’ convertible bonds,” said Aly-Khan Satchu, an investment analyst.
“It is in many ways a non-sequitur and might inform us of why the CEO departed.”
TransCentury’s chairman and significant shareholder, Zephania Mbugua, declined to comment on the matter.
To put the debt crisis in perspective, the Sh8 billion owed through the five-year bond is more than three times TransCentury’s market capitalisation.
Adding forex losses — the dollar has gained 27.5 per cent since TransCentury issued the bond in June 2011 — the debt balloons to over Sh10 billion.
This gulf between the company’s value and what it owes has led analysts to suggest that it is far cheaper for the company to default on the loan than to try to pay it off.
Defaulting would turn the bondholders into shareholders in a company whose value represents only a fraction of their entitlement.
TransCentury issued the bond in June 2011 through its subsidiary, TC Mauritius Holdings, which was a private company at the time and fully guaranteed the debt.
TransCentury said it could not reveal the identities of the bondholders due to a confidentiality agreement.
The firm listed on the NSE by introduction in July 2011, a month after issuing the bond, seeking to reap the benefits of the market’s liquidity and price discovery.
Since listing, the company’s top 10 founders, including Mr Mbugua, investment banker Jimnah Mbaru and NSE chairman Eddy Njoroge have cut their combined stake from 60 per cent to 47 per cent as of November last year.
Mr Mbaru, who initially held a 6.24 per cent stake in the firm, has disappeared from TransCentury’s list of top individual owners after trading most of his holdings.
An important anecdote to TransCentury’s journey is that its founders are prominent individuals whose influence peaked during President Mwai Kibaki’s tenure.
That list includes former KRA Commissioner-General Michael Waweru, who is both a director and a shareholder.
A fundamental question that has yet to be answered is why the loan could not pay for itself — its proceeds having been earmarked for investment in various transport and energy projects.
At a conservative average return rate of 10 per cent, available on government bonds over the same period, the original principal of Sh6 billion would have compounded to about Sh10 billion today.
That performance would have left TransCentury in a break-even position at worst. The fact that the company is seeking to raise the entire outstanding amount from new sources of debt signals that its investment of the bond proceeds have been unprofitable so far, leading to the upcoming squeeze.
“I can only presume that if this is paid it is paid by someone who takes the whole thing [TransCentury] over lock, stock and barrel,” Mr Satchu said.
TransCentury said in a statement that it invested the funds in acquiring stakes in Civicon, an engineering firm, and railway concessionaire Rift Valley Railways (RVR).
“While the engineering division has shown remarkable growth, the transport division [RVR] didn’t generate targeted return, leading to our exit in 2014,” the company said, adding that it recouped the entire Sh3.8 billion it had invested in RVR since 2006 and redeployed the funds in infrastructure projects as well as into growing capacity in its various operations.
The recent meltdown in Kenya’s nascent oil prospecting industry is, however, seen presenting a new threat that could hurt Civicon — which has significant contracts with players in that sector such as Tullow Oil — in the short term.
“Evidently losing the RVR investment was expensive and I assume they have not enjoyed the best of times elsewhere,” Mr Satchu said.
Nine weeks to the maturity date, the company is yet to finalise and share the debt repayment plan with shareholders.
TransCentury last year created new shares in preparation for a rights issue it said would raise funds to settle the debt and leave a clean balance for new investments.
Analysts at Standard Investment Bank (SIB) said they expected the cash call to have been launched by December last year but this did not come to pass.
The investment firm is now understood to be exploring other fundraising options, including taking on new debt, signalling that it has abandoned the rights issue route that would have tested investor appetite for the stock.
TransCentury entered the NSE at an offer price of Sh50 but the share price closed yesterday’s trading at Sh7, representing an 86 per cent decline. The price collapse is part of the reasons the bondholders could not convert their units into shares.
The conversion terms were fixed at an exchange rate of 80.4 units of the shilling to the dollar while the share price was on a glide path that terminated at a high of Sh49.6 in the fifth and final year.
The weakening of the shilling and TransCentury’s share price erosion has scuttled the conversion window that has since closed, having been set at up to 90 days before the maturity date.
Sources told the Business Daily that TransCentury is also in talks with the bondholders, a signal that it could seek an extension of the loan redemption or offer them better conversion terms.
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 original investment.
The challenges faced by TransCentury, the poster child of group investments commonly known in Kenya as ‘chamas’, is testament to the dangers of leverage.
Initially fashioned as an investment club in 1997, the company raised Sh29 million in seed capital it used for take-off in 2003.
It made passive investments at the NSE and bought a minority stake in Castle Brewing Limited, exiting in 2002 when the brewer’s parent firm SAB Miller pulled out of the local market.
The company, whose assets have grown to billions of shillings, made its first net loss of Sh2.2 billion in 2014 after booking a paper loss of Sh1 billion from the RVR divestiture.
Its key investments include a 68.38 per cent stake in East African Cables, a producer of telecommunication and electrical cables which is also listed on the NSE.
The wealth erosion at TransCentury is second only to Kenya Airways, whose shareholders currently have no equity even as they still owe creditors Sh33.9 billion.