UK fund CDC Group risks Sh14bn loss in ARM collapse


ARM Cement's Pradeep Praunrana. FILE PHOTO | NMG

British investment fund CDC Group is emerging as the biggest loser from the collapse of cement maker ARM, #ticker:ARM with its Sh14 billion investment in the troubled company at stake.

The UK development finance firm has seen over 80 per cent of its initial share value eroded in just slightly more than two years since it bought a 42 per cent stake in the cement maker for Sh14 billion.

With the company’s fate now in the hands of administrators, CDC’s chances of recovering the investment hang in the balance.

Shareholders are ordinarily the last lot in the compensation pecking order whenever a collapsed company goes into liquidation.

The Nairobi Securities Exchange (NSE) #ticker:NSE Monday suspended trading of ARM Cement shares at the bourse.

READ: Troubled ARM suspended from Nairobi bourse

“The suspension in trading of the company’s shares takes effect from August 20, 2018,” the NSE said in a statement.

“This suspension shall remain in force for seven (7) working days.”

Relinquish post

UBA Bank appointed PricewaterhouseCoopers as ARM’s administrators days after the cement firm’s chief executive officer, Pradeep Paunrana, said he was relinquishing his post but staying on its board.

PWC’s Muniu Thoithi and George Weru were appointed joint administrators of the business.

READ: ARM Cement placed under administration

READ: End of an era as Paunrana family loses grip on ARM

READ: KISERO: PE funds looking bad on Paunrana’s ARM

ARM secured a $140 million (about Sh14.1 billion) investment from CDC in April 2016.

CDC and ARM at the time said in a joint statement that the money would be used to retire some of the cement maker’s debts.

Guernsey Island-registered CDC African Cement (CADAC), a wholly owned subsidiary of CDC Group, paid Sh40 per share for 353.7 million ARM shares.

ARM had in March 2016 said that it would spend $110 million (Sh11 billion) to retire its debt while the rest would go into capital expenditure.

ARM’s troubles, which culminated with Saturday’s administration order, have put on the spotlight CDC’s hefty investment.

The British fund did not respond to our enquiries by the time of this article was published.

ARM has seen its market share plunge to just 10 per cent after the clinker plant it built in Tanzania in 2014 failed to generate income.

The tell-tale signs that all was not well at the company have been there in recent years, with shares falling from highs of Sh90 a piece in 2014 to Sh5.55 last Friday.

“It really makes one wonder as what "cowboy" type operation CDC are operating. Their due diligence in this case has been found seriously wanting. The biggest mystery remains the lack of clarity,” said investment adviser Aly Khan Satchu.

Saturday’s move instigated by UBA Bank, which moved to court and obtained an order for the insolvency, came as a surprise to CDC which sources said had earlier committed to inject more capital to keep the cement maker afloat.

Management shake-up

CDC was banking on an ARM management and board shake-up it had orchestrated only last week to attempt to boost ARM’s sagging fortunes and recoup its investments.

The UK fund had announced that a new CEO would be appointed to replace Mr Paunrana. The key boardroom changes had also seen businessman Linus Gitahi tapped to take over as chairman.

The company’s insolvency has also left suppliers of the cement maker, employees and bondholders staring into an uncertain future.

Local and regional lenders are exposed to the tune of billions of shillings.

ARM had borrowed loans as a group amounting to Sh14.4 billion as at last year.

The debt comprised bank loans (Sh6.5 billion), Aureos income note (Sh1.4 billion), corporate bond (Sh1.03 billion), commercial papers (Sh771 million) and bank overdrafts (ShSh4.5 billion).

The borrowings were repayable within five years as at December 2017.

Eight local banks

ARM had borrowed from eight local banks as at last year.

It had borrowed Sh4.6 billion from Africa Finance Corporation, Stanbic Bank Kenya (Sh1.7 billion in loans and overdrafts), Guaranty Trust Bank (Sh550 million), UBA Bank (Sh340.4 million) and Barclays Bank of Kenya (Sh229 million).

ARM subsidiary Maweni Limestone Limited had also incurred huge debt from other lenders.

Stanbic lent the firm Sh1.5 billion, Standard Bank Mauritius, (Sh824 million), Development Bank of South Africa (Sh781.7 million), Trade and Development Bank (TDB), formerly known as the Eastern and Southern African Trade and Development Bank (PTA Bank), (Sh381.4 million) and Canara Bank (Sh20 million).

ARM Rwanda had borrowed Sh11.2 million from Bank Commercial Du Rwanda last year.

The Insolvency Act of 2015 gives companies going through financial turmoil an opportunity to put their act together, including settlement of debts.

This allows them to continue to operate instead of the earlier practice of abruptly killing them as was the case under the previous Act.

Second major company

ARM becomes the second major company to benefit from the law after cash-strapped retailer Nakumatt Holdings in January.

“The primary objective of administration is to enable an administrator, a licensed insolvency practitioner, to explore the possibility of rescuing the company either as a going concern or for achieving a better outcome for creditors than would likely be the case if the company were liquidated,” PwC said in the statement.

“The joint administrators are currently engaging all key stakeholders of the company to elicit their cooperation as they seek to achieve the best possible outcome to the current situation of the company.”