East African Breweries Limited (EABL) recently revised the pricing supplement for the first tranche issue of
its Sh11 billion medium term note programme. Cut the jargon.
Essentially, they have restructured the bond. And they have done it in a
very simple manner—by way of pushing forward the principal redemption
date by two years. It was a three-year note issued on March 25, 2015
with a redemption slate of March 19, 2018—raising Sh5 billion in the
process.
Redemption has now been rolled over to March
19, 2020. To compensate investors, they have premiumised the coupon by
70 basis points—pricing the bond at 12.95 per cent per annum payable
semi-annually. I must say I haven’t seen any member of the so called
blue-chip grouping restructure a debt in such a long time.
But
I’m also not ringing any alarm bells here. I mean, there could be a
myriad of reasons behind any restructure—but usually, liquidity
constraint is top of the list. The key to understanding any debt
restructuring lies in contextualising the underlying issues.
Well,
for EABL, working capital constraints may have faded—and I say so for
two reasons: first, for the first time since 2010, they were able to
close fiscal year 2017 with positive unencumbered cash and, secondly,
they significantly brought down short-term liabilities (payables and
short term loans).
Essentially, they seem to be getting
very efficient with working capital (and I hope I don’t speak too soon
on this one). However, the continued balance sheet congestion may have
played a big part in the restructure.
The first congestion point is debts—and the annual debt servicing sums are staggering. In fiscal year 2016, they had to part with Sh16 billion from their cash flows in debt repayments (interest plus principal). This year, the interest component alone stood at Sh3.3 billion; they are yet to disclose the principal bit.
The first congestion point is debts—and the annual debt servicing sums are staggering. In fiscal year 2016, they had to part with Sh16 billion from their cash flows in debt repayments (interest plus principal). This year, the interest component alone stood at Sh3.3 billion; they are yet to disclose the principal bit.
Beyond debt servicing, they’ve just announced the
retooling of the Kisumu kegging plant with a capex commitment of Sh15
billion—which looks likely to be funded via debt. Leverage is not that
bad, anyway. Receivables have also continued to build up.
Further,
they still have to deal with the mismatch between capex maturity and
maturity of debt liabilities used to fund the capex. They also have
extreme operational issues to handle. With continued emphasis towards
low-margin products, the product mix isn’t optimal.
For instance, the retooling of Kisumu kegging plant may
serve to entrench product mix de-optimisation, for the simple reason
that keg products are low-margin-unless they secure long-term tax
concessions.
Secondly, the issue of concessions to Ugandan distributors still hangs around.
Thirdly, the Tanzanian business is yet to return capital, plus other regulatory issues. Don’t forget South Sudan.
For
me (and for you the investor), the debt rollover may not necessarily
signal a potential liquidity issue for EABL, but epitomises the
company’s inability to decongest its balance sheet and effectively
ring-fence its income statement from the biting operational issues.
There
is a risk that continued domiciliation of the two variables in the
company’s business could still trigger more balance sheet restructurings
in the short and medium term.
Mr Bodo is an investment analyst george.bodo@gmail.com
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