East African Breweries Limited (EABL) #ticker:EABL has breached the terms attached to a Sh11 billion corporate bond, prompting the Nairobi Securities Exchange-listed firm to get a waiver of the conditions from the Capital Markets Authority (CMA).
The brewer is required to maintain a current ratio — a measure of a company’s ability to meet its short term obligations — of at least 1. This means that its current assets including cash balances should at least match short term liabilities such as bank overdrafts and supplier debt.
EABL says this ratio fell short at 0.83 partly due to the receipt of new bank loans in the period. “For the medium term note, the Capital Markets Authority has exempted the group from maintaining a current assets ratio of 1 until 2020,” the company says in its latest annual report.
EABL raised Sh11 billion in two tranches of unsecured bonds. Investors gave the company Sh5 billion at an annual interest rate of 12.95 per cent, with this batch of securities set to mature in March 2020.
The brewer also received Sh6 billion in the second issue which has an annual interest rate of 14.17 per cent and a redemption date of March 2022.
The company has increased its borrowing in recent years, partly to fund new capital expenditures.
EABL, for instance, is building a Sh15 billion factory in Kisumu that will produce its Senator beer brand that targets low-income consumers.
It received loans amounting to Sh300 million for the construction of the plant in the year ended June, with more funding set to be sourced as the project progresses. The company had undrawn available funding of Sh13.4 billion as of June.
The brewer, while noting that it has net current liabilities of Sh4.2 billion, says this is likely to change as it seeks to reduce short term debt in favour of longer-term borrowings.
“As directors, we are satisfied that this is transient in nature as the group continues to align its capital expenditure with long term funding,” the company said.
EABL was the latest to raise funds from a bond in April last year in a market where other issuers have defaulted or restructured their obligations, causing major losses for bondholders whose claims were unsecured.
ARM Cement #ticker:ARM, Nakumatt Holdings, Chase Bank and Imperial Bank are some of the borrowers that have defaulted on their bonds and commercial papers.
Investors in the instruments have traditionally asked for above-market interest rates as compensation for lack of collateral and looser covenants.