Mumias’ rating falls as sugar firm put on ‘watch’ list

Money Markets

Mumias Sugar Company factory. Financial woes continue to dog the sugar miller. PHOTO | FILE 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• Global Credit Ratings (GCR) has downgraded the troubled sugar miller’s long-term credit rating to BBB from A of December last year and A+ in 2012.
• The firm has been through a rough patch due to financial strains and issues of corporate governance that GCR said were likely to further impact Mumias’ credit rating.
• A downgrading of a company’s credit rating indicates uncertainty over its ability to service debts.

Mumias Sugar Company has suffered a credit-rating downgrade with a probability of further deterioration, reflecting the firm’s worsening financial position.

South African-based Global Credit Ratings (GCR), licensed by the Capital Markets Authority to evaluate the financial strength of firms listed on the Nairobi Securities Exchange, downgraded the troubled sugar miller’s long-term credit rating to BBB from A of December last year and A+ in 2012.

The firm has been through a rough patch due to financial strains and issues of corporate governance that GCR said were likely to further impact Mumias’ credit rating.

“GCR has noted several instances of weak corporate governance that have seen the suspension of certain senior and middle managers. On the basis of these governance issues and the challenges within core operations, GCR has placed Mumias’ ratings on “Rating Watch”, and accordingly, “will continue to monitor the ratings closely,” GCR said in a summary of its report on the company.

A downgrading of a company’s credit rating indicates uncertainty over its ability to service debts.

Mumias has been struggling to service its massive debts, forcing it to sit with seven banks to restructure its loans to ease the repayment burden. Poor rating means a company borrows at a stiffer interest rate and is likely to be damaging to Mumias.

The miller is the largest sugar producer in Kenya accounting for an estimated 28 per cent of the domestic production that is, however, down from previous 40 per cent.

The company has been affected by reduced sugar cane cultivation by outgrowers in response to weak prices and poaching of cane grown with Mumias-sponsored inputs, as well as reduced crop and sugar yields. Mumias Outgrowers Company is demanding billions in delayed payments by the listed sugar producer.

READ: Mumias stock shrinks to 91pc of State offer price

The operational challenges saw the company sink deeper in the red with a full-year loss of Sh2.7 billion down from Sh1.6 billion last year. The company’s management has also blamed the poor performance on an influx of illegal imports that have eroded its competitive position.

“The assurance from government authorities to increase vigilance on imported and counterfeit sugar will be a critical factor in ensuring competitive pricing,” says Coutts Ottolo, managing director at Mumias.

He added that the company was investing in an additional packaging plant capacity that would improve its margins and help it regain market share.

In its annual report the company hinted at staff lay-offs. The miller cut its workforce by 243 employees in the year to June this year.

Protection of Mumias from competitors in the Common Market for Eastern and Southern Africa (Comesa) region is set to expire in February next year.

Expiry of the Comesa quantitative restrictions will see sugar companies operating in Comesa countries allowed to export to Kenya tax free.