EABL to cut short-term debt with Sh6bn bond proceeds

Production Workers outside the brewer’s plant in Ruaraka, Nairobi. FILE PHOTO | NMG 

By CHARLES MWANIKI

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Summary

• The firm raised the entire Sh6 billion it was targeting from the issue, which ran between March 13 and 24, defying a recent poor run for corporate bonds that has put off firms from the market.
• The EABL unsecured paper was seen as a test for investor appetite for corporate debt.
• The oversubscription therefore shows that investors are still willing to lend to corporates, although at a significant premium, in the case EABL above maximum commercial bank loan rate.

East African Breweries Limited (EABL) will use the proceeds of its oversubscribed five-year bond issue to retire short-term debt.

READ: EABL's says its medium-term bond oversubscribed

The firm raised the entire Sh6 billion it was targeting from the issue, which ran between March 13 and 24, defying a recent poor run for corporate bonds that has put off firms from the market.

The bond registered an oversubscription of 41 per cent, with investors offering Sh8.45 billion.

The initial issue of the two- tranche bond had raised Sh5 billion, which the beer-maker and distiller put into capital expenditure in its plant.

It says the second issue will go towards debt restructuring, likely targeting a short-term bank overdraft it holds with Standard Chartered and Citi Bank.

“The funds from the second series (issue) will be used to restructure the company’s balance sheet, which will entail the repayment of short-term loans ensuring that EABL matches its borrowings with its medium-to-long-term capex and working capital investments,” said EABL in a statement.

The brewer’s balance sheet for the six months ended December 2016 listed the Sh5.95 billion overdraft facility with the two lenders as its only current liability—meaning it is due within a year— which carries an effective interest rate of 8.96 per cent.

Had the listed company opted not to use the bond proceeds to retire some of its existing debt, it would have seen its net debt position that stood at Sh25.1 billion go above Sh30 billion—at a time its net finance cost has risen by 7.1 per cent year-on-year to Sh1.5 billion for the half year to December 2016.

The EABL unsecured paper was seen as a test for investor appetite for corporate debt, whose reputation was hit after the collapse of Chase Bank and Imperial Bank in 2015 shortly after they went to market with corporate debt offers.

Investor appetite

The oversubscription therefore shows that investors are still willing to lend to corporates, although at a significant premium, in the case EABL above maximum commercial bank loan rate.

The market did not react to the successful fund raising after the announcement. There was little activity on the EABL counter yesterday as the share rose a shilling to Sh226 on trade of just 200 units.