Corporate News
From left, former TransCentury CEO Gachao Kiuna and some of the firm's
founding members Eddy Njoroge, Jimnah Mbaru and Zephania Mbugua. PHOTOS |
FILE |
NATION MEDIA GROUP
By VICTOR JUMA, vjuma@ke.nationmedia.com
In Summary
- To put the debt crisis in perspective, the Sh8 billion owed through the five-year bond is more than three times TransCentury’s market capitalisation.
- Adding forex losses — the dollar has gained 27.5 per cent since TransCentury issued the bond in June 2011 — the debt balloons to over Sh10 billion.
- TransCentury said it could not reveal the identities of the bondholders due to a confidentiality agreement.
- An important anecdote to TransCentury’s journey is that its founders are prominent individuals whose influence peaked during President Mwai Kibaki’s tenure
Last week’s sudden resignation of TransCentury’s
long-serving chief executive Gachao Kiuna is being seen as the initial
consequence of a debt storm that is looming over the company —
threatening to wipe out the shareholders’ investment.
Before Dr Kiuna’s exit, the Nairobi Securities
Exchange (NSE)-listed firm had been sanguine about the approaching
maturity of a Sh8 billion dollar-denominated convertible bond that is
due for payment on March 25.
Analysts say it is almost impossible to retire the
bond because any plan devised to redeem the debt will result in existing
shareholders handing over the company to whoever will provide the
funds.
“I struggle to understand how TransCentury, a
company whose market capitalisation is Sh2.4 billion, is going to raise
Sh8 billion to redeem these deep ‘out of the money’ convertible bonds,”
said Aly-Khan Satchu, an investment analyst.
“It is in many ways a non-sequitur and might inform us of why the CEO departed.”
TransCentury’s chairman and significant shareholder, Zephania Mbugua, declined to comment on the matter.
To put the debt crisis in perspective, the Sh8
billion owed through the five-year bond is more than three times
TransCentury’s market capitalisation.
Adding forex losses — the dollar has gained 27.5
per cent since TransCentury issued the bond in June 2011 — the debt
balloons to over Sh10 billion.
This gulf between the company’s value and what it
owes has led analysts to suggest that it is far cheaper for the company
to default on the loan than to try to pay it off.
Defaulting would turn the bondholders into
shareholders in a company whose value represents only a fraction of
their entitlement.
TransCentury issued the bond in June 2011 through
its subsidiary, TC Mauritius Holdings, which was a private company at
the time and fully guaranteed the debt.
TransCentury said it could not reveal the identities of the bondholders due to a confidentiality agreement.
The firm listed on the NSE by introduction in July
2011, a month after issuing the bond, seeking to reap the benefits of
the market’s liquidity and price discovery.
Kibaki-era tycoons
Since listing, the company’s top 10 founders, including Mr
Mbugua, investment banker Jimnah Mbaru and NSE chairman Eddy Njoroge
have cut their combined stake from 60 per cent to 47 per cent as of
November last year.
Mr Mbaru, who initially held a 6.24 per cent stake
in the firm, has disappeared from TransCentury’s list of top individual
owners after trading most of his holdings.
An important anecdote to TransCentury’s journey is
that its founders are prominent individuals whose influence peaked
during President Mwai Kibaki’s tenure.
That list includes former KRA Commissioner-General Michael Waweru, who is both a director and a shareholder.
A fundamental question that has yet to be answered
is why the loan could not pay for itself — its proceeds having been
earmarked for investment in various transport and energy projects.
At a conservative average return rate of 10 per
cent, available on government bonds over the same period, the original
principal of Sh6 billion would have compounded to about Sh10 billion
today.
That performance would have left TransCentury in a
break-even position at worst. The fact that the company is seeking to
raise the entire outstanding amount from new sources of debt signals
that its investment of the bond proceeds have been unprofitable so far,
leading to the upcoming squeeze.
“I can only presume that if this is paid it is paid
by someone who takes the whole thing [TransCentury] over lock, stock
and barrel,” Mr Satchu said.
TransCentury said in a statement that it invested
the funds in acquiring stakes in Civicon, an engineering firm, and
railway concessionaire Rift Valley Railways (RVR).
“While the engineering division has shown
remarkable growth, the transport division [RVR] didn’t generate targeted
return, leading to our exit in 2014,” the company said, adding that it
recouped the entire Sh3.8 billion it had invested in RVR since 2006 and
redeployed the funds in infrastructure projects as well as into growing
capacity in its various operations.
The recent meltdown in Kenya’s nascent oil
prospecting industry is, however, seen presenting a new threat that
could hurt Civicon — which has significant contracts with players in
that sector such as Tullow Oil — in the short term.
“Evidently losing the RVR investment was expensive
and I assume they have not enjoyed the best of times elsewhere,” Mr
Satchu said.
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