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EA Cables turnaround plan in capital-starved market

Paul Muigai
EA Cables chief executive Paul Muigai. PHOTO | FRANCIS NDERITU | NMG 

East African Cables Ltd is fighting a liquidation suit in court over default in servicing short-term loans. SBM Bank and Ecobank have cited failure to service loans amounting to about Sh285 million and Sh190 million respectively in their separate insolvency petitions.

The listed electrical and communications cables and conductors manufacturer has been returning losses since 2015 on the back of a debt-driven Sh2 billion expansion that was completed in 2016.

The company, which is 68 percent controlled by TransCentury #ticker:TCL, has, however, rubbished perceptions that its fortunes in the past years were partly driven by political connections of its directors during the regime of retired President Mwai Kibaki.

Chief executive Paul Muigai has defended the company’s strategy, arguing that it will once again start delivering returns to shareholders in coming years.

He spoke to Business Daily’s Constant Munda.

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How did East African Cables end up in its current debt situation?

We went through an expansion phase between 2014 and 2016 where we raised capacity from 250 to 750 metric tonnes per month. We also modernised our factory along Kitui Road (in Nairobi’s Industrial Area). The original factory, built in 1960s, was very hot and stuffy, and you could literally touch the ceiling once inside. That required a lot of capital. It cost us Sh2 billion.

What kind of loans did you contract to fund the plan?

It is very difficult to get long-term capital in this market for the kind of investment we were doing, say a 10-year loan. Because we couldn’t find that, we tended to find like 48-month facilities. That really ties your capital because your repayments are much bigger than when you get much long-term capital like 10 years. By the time we were finishing the expansion in 2016, we had taken quite a bit of capital because if you start something you must finish. Therefore, we ran into a cash crunch.

How easy was it to get funds at the time?

In 2016, our parent company (TransCentury) was also undergoing the bond issue reports which unfortunately created a negative perception that it will default and that didn’t help. In fact, we got some term sheets that were never honoured because also as a financier, you want to wait and see. Meanwhile, if you are waiting (for the loan) and the company is short of cash, it is like holding somebody below the water. You can only continue sinking.

How did you respond to those challenges?

From that time, we have been working on restructuring our facilities, which we succeeded last year. We restructured 82 percent of the short-term debt to long-term. That eases repayments and you can be comfortable with revenue that you are generating. In fact, we got a six-month moratorium on interest which expired (in December 2019) and we now are paying. But we don’t start paying the principal until May next year because we had a two-year moratorium from April last year.

The rest of it (the debt) is what we are discussing for restructuring, and that’s where the SBM issue (insolvency petition) comes in. We were in discussion even last year.

Looking back, was it wise to embark on the expansion drive?

We are very proud of the expansion strategy. We now have the best technology and biggest capacity in the East African region, and our skillset is one of the highest.

The strategy is working. You need cash to buy materials, but if your (loan) facilities are weighing you down, you really don’t have as much money to invest in the business. That’s why we are restructuring them down. That lightens your load on repayments, and you can now concentrate on buying materials and servicing the market.

What are some of the tangible results you have realised so far since you started restructuring your debt?

We have managed to consistently bring our costs to a comfortable level whereby we are very competitive.

We are also now marketing ourselves more. Out of all these efforts, we have started to see a turnaround.

I can’t give you figures because we are a listed company and they are still being audited. But we have seen a turnaround whereby our copper business (electrical cables and conductors for domestic and industrial connections) has gone up, and we are riding on that.

We grew last year and we are now seeing further growth this year. In fact, the first seven weeks of this year are very encouraging. If we continue with this strategy, we will definitely come out of that lower-volume regime very soon.

How did East African Cables benefit from heightened electricity connection to homes between 2016 and 2017?

We participated in the rural electrification. We made a lot of drop-wire deliveries (those that connects to meter boxes) between 2016 and 2017. We were taking advantage of that, but if you don’t have full working capital, you are a bit slower. Also if the facilities are not long-term, you are draining quite a bit of cash in terms of capital on repayments.

How is illicit trade in the market impacting on your business?

The issue of illicit trade.... The formation of multi-agency team has had quite a lot of impact. Of course, things try to fight back. It is not eradicated.

There’s still a lot of work for the agency to do, but you can see that impact.

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