Financially distressed companies have become categorised as risky borrowers. FILE PHOTO | NMG
We have, over the last two
years, seen companies trading in the Nairobi bourse falling into
financial distress, most shocking of all being companies that have been
on a profit-making streak.
Banks on the other hand have
also held that they will pull out from financing companies that do not
make any profitable returns in the financial markets; invariably meaning that a considerable number of financially distressed companies will soon be placed under administration.
make any profitable returns in the financial markets; invariably meaning that a considerable number of financially distressed companies will soon be placed under administration.
Taking into
account the introduction of the lending rates, currently at 13 percent,
banks have been quite cautious when extending loan facilities to
financially distressed companies. In fact, most banks would rather issue
term loan facilities and overdrafts to companies with better security,
and lesser risks.
Financially distressed companies have
become categorised as risky borrowers, thus the hardship they face when
seeking to restructure their debts including debt financing, which
consequently results to them being placed under administration.
Most
companies are dependent on internal sources of finance, i.e. equity
finance, provided by their owners (shareholders), retained profits,
loans from shareholders and directors.
However, for
munificent capital injections, companies will seek loan facilities from
commercial banks. Large companies also have more choices available to
them, as they may seek either bank-based or market-based financing. The
heavy dependency on Bank financing is nonetheless an issue that has been
the focus of concern in a number of official reports, stretching back
several years ago.
The dilemma in our capital markets
(especially when listed companies seek market-based financing) is the
inevitable tension between investor protection and capital formation.
Poorly
managed and operated companies will more often than not post false and
misleading reports to the public, making investors rely on such
financial reports to their detriment.
Although the Capital Markets Authority (CMA) as a regulatory
body ensures that investors are protected, and those that have suffered
loss as a result of inadequate, false and misleading corporate
information are compensated (not to mention the fining of such
companies), the question still remains, why do we have these systematic
risks in the markets?
I, for one think it is high time
the CMA cracks the whip on some listed companies; astutely investigating
their statements and financial reports to ensure that the correct
numbers and the true statement of accounts are published on time.
The
CMA recently revealed a list of companies that continue to trade well
below their required capital and liquidity levels. It is a requirement
that any company listed in the Nairobi bourse, should, desirably, have
its currents assets double the size of its current liabilities.
Disclosure of relevant information by a listed company constitutes a
pivotal regulatory technique, with its effectiveness depending on the
level of enforcement.
Baston Woodland, Advocate of the High Court of Kenya.
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