EABL seeks new deal with Diageo on Sh19.9bn loan

 

EABL Group managing director and CEO Charles Ireland during the interview at his Ruaraka office in Nairobi on September 9, 2013. Photo/DIANA NGILA  Nation Media Group

By VICTOR JUMA

In Summary

• The brewer is seeking more favourable terms on a five-year loan that has seen it pay an interest rate of more than 12 per cent.
• EABL is exploring using a mix of fixed and variable interest rate repayments in the negotiations that are expected to be finalised by year-end.

East African Breweries Limited is renegotiating the terms of a Sh19.9 billion loan that has contributed to a sharp increase in its finance costs and reduction in profit.

The firm’s CEO, Charles Ireland, told the Business Daily that the brewer is seeking more favourable terms on a five-year loan that has seen it pay an interest rate of more than 12 per cent.

EABL’s earnings have in the past two years taken a hit on account of the November 2011 credit by its UK parent firm Diageo, to buy back the 20 per cent stake in its Kenyan unit earlier sold to rival SAB Miller.

Diageo advanced the loan to EABL pegging the interest rate payments on Kenya’s 364-day Treasury bill plus 1.5 per cent premium.

“We have a team working to negotiate a review of the loan agreement,” Mr Ireland said.

He added that EABL is exploring using a mix of fixed and variable interest rate repayments in the negotiations that are expected to be finalised by year-end.

Review of the loan term comes at a time interest on the latest 364-day paper issued on September 6 dropped marginally to 11.4 per cent compared to 11.6 issued on August 30.

The interest rate is, however, higher than the low of 8.3 per cent on a similar security issued on June 28. 

READ: Interest rate surge dims EABL profit growth prospects

As of June, the outstanding long-term loan had reduced marginally to Sh19.8 billion and it remains to be seen what concessions the brewer can secure from Diageo in terms of interest repayments.

EABL’s net finance costs jumped 15 per cent to Sh3.8 billion in the year ended June compared to Sh3.3 billion the year before, driven by the Diageo loan and a sharp rise in short-term borrowings. The firm’s bank overdrafts increased 428 per cent to Sh6.2 billion from Sh1.1 billion in the same period.

Its net profit dropped 38 per cent to Sh6.9 billion in the period compared to Sh11.1 billion last year when it benefited from a one-time gain of Sh3.6 billion from the Tanzanian disposal.

The sales came after Diageo and SABMiller ended their uneasy alliance, kicking EABL out of Tanzania and SABMiller from Kenya operations, in a deal that has seen EABL recapture full earnings from its Kenyan unit.

Analysts at Old Mutual Securities say the high finance costs will continue to affect the company’s profitability and dividend payouts in the medium term.

The company declared a total dividend of Sh5.5 per share for the year ended June, down from Sh8.75 last year. Its share price has remained unchanged at Sh296 over the past six months.