By Kenneth Kwama
When the oldest government-owned transport company, Kenatco Taxis Ltd decided to take a Sh22.4 million bank loan in mid 1980s, the objective was to increase its fleet, reap from operational efficiencies and expand its business.
Unable to meet its repayment obligations to the National Bank of Kenya, Kenatco was placed under receivership in 1996. Currently, it is being run by the appointed managers and the loan has since grown to over Sh300 million in accrued interest.
Despite being under statutory management for the past 14 years, Kenatco has not shown any signs of recovery. In fact, its debt portfolio is growing. It amplifies the near helpless situation in which companies that are placed under receivership find themselves in Kenya.
"The laws on receivership are unfriendly. Most of the companies put under statutory management do not live thereafter. They just die," says Job Kihumba, Executive Director Standard Investment Bank.
This is because the creditors don’t care about anything else than recovering their money," Kihumba says.
Rising costs for energy and falling consumer demand is putting a train on the bottomline of many businesses, particularly in non-resource exposed parts of the country like Webuye, western Kenya.
Before it was placed under receivership two years ago, Pan Paper Mills had chalked up huge debts due to rising operational costs and general slowdown of business. By the time it went belly up, the paper company owed Kenya Power and Lighting Company in excess of Sh100 million in unpaid power bills.
Signs of distress
Business owners should know what it means to be insolvent-basically, not being able to pay debts when they fall due. According to an expert who specialises in diagnosing the health of businesses who works for a major consultancy firm in Nairobi, detecting signs of impending insolvency can be also be difficult.
The expert who requested not to be named because he is currently overseeing the liquidation of a well-known entity says that while fundamentals such as declining profit margins, cash flow and outgoings versus receivables are the usual indicators, non-financial factors can also provide strong pointers to looming trouble.
"A high level of staff turnover can also be relevant. Staff can often read the signs of difficult times, so if they are jumping ship it’s a bad sign. Creditors putting a stop on supplies is also a key warning," he says.
Looking at the health of a business’ overdraft can also tell a story, he says. The function of an overdraft is to cover short-term financial hiccups, so that it then comes to zero over a cycle.
So if it is constantly floating near its limit, trouble could be around the corner.
"This is what happened in the case for KPCU. The cooperative operated so much on overdrafts, which were eventually converted to loans when it became apparent it couldn’t pay," says the expert.
Analysts say although receivership is viewed as a way of guaranteeing a company’s future survival, most firms under statutory management will still remain in limbo if the laws governing receivership are not reviewed to enable the firms that can be pulled out of receivership survive.
Bleed debtors
There is consensus that the current laws provide leeway to entities owed money —whose chief concern is recovery of their loans — to bleed their debtors sometimes to death, leading to the collapse of companies that could have been saved by proper management.
Out of close to 50 firms that have been placed under receivership since the 1990s, the recent revival of Uchumi Supermarkets under a State rescue package, and that of Invesco Assurance Company through the injection of capital by Matatu Owners Association, have provided hope that the idea can work if properly managed.
Another company, which has had a fresh start, is Rivatex Ltd, which manufactures textiles after it was bought by Moi University.
While all sectors are vulnerable, Managing Director Tsavo Securities Ltd, Fred Mweni says history suggests it is businesses that are affiliated to the government and parastatal that are most vulnerable to insolvency.
"Look at KPCU, Kenatco, Pan Paper Mills and many others typify this argument. The reason is partly because these are the places you are likely to find slack management practices," Mweni says.
Thousands of Kenyans have lost their jobs over the last two decades after factories that employed them folded or were placed under receivership.
The collapse of Kisumu Cotton Mills (Kicomi), for example, led to thousands of job losses for both cotton farmers and factory workers.
The firm’s collapse was primarily blamed on the negative sting of the structural adjustment programmes (SAPs) popularised by the World Bank and the International Monetary Fund. These measures eliminated price controls leading to unregulated liberalisation of the country’s cotton sub-sector.
The tragic fate of Kicomi also raises a fundamental question: Does receivership really work?
The cotton miller was placed under receivership with PricewaterhouseCoopers (PwC) as the receiver managers. But the receiver sold it to an Asian entrepreneur, Rumi Singh, for an undisclosed fee in 1993. Not much has been heard of the firm since then.
Besides Kicomi, other companies that have gone quiet after being placed under receivership include Liberty Assurance Company, which was placed under receivership in 2003. Webuye’s Pan Paper Mills, Muhoroni and Miwani sugar companies are among the latest in the fold.
In 2008, Triton Petroleum was put in receivership over a Sh1.6 billion debt. A few years ago, Swan Industries was also placed under statutory management by Investment and Mortgage Bank (I&M Bank) over a loan in excess of Sh200 million.
Make no difference
With all these examples of failed rescue moves, is it still necessary to call in receivers? Already, it is evident a majority of the receivers don’t make any difference to the company’s operating margins.
Mweni says the instinctive optimism of the entrepreneur sometimes means they are blind to the true condition of their business.
"Business owners get emotionally involved, and that sometimes makes them too optimistic about potential success and reluctant to see problems," he says.
Ironically, this blind optimism sometimes accelerates a businesses fall into insolvency because it means that decisions and changes required to fix things are delayed.
Experts agree that the earlier a problem is detected, the more options the business is likely to have. If insolvency is not imminent, a turnaround specialist may be able to assist management to rescue the business.
"If the business is teetering on the edge of the precipice, it may be necessary to give up control to an external manager by entering into voluntary administration, which is not always the case in Kenya where businesses are usually forced into receivership," says the expert.
Although receivership is a concept that many struggling businesses in the country do not welcome, the successful turnaround of Uchumi Supermarkets presents adequate persuasion to business owners faced with hard choices to reconsider hard line positions in future.
Uchumi’s recovery followed three broad stages that encompassed stabilisation, consolidation and positioning.
The stabilisation stage involved fixing the business’s immediate problems to prevent it falling into insolvency. The receiver manager, Jonathan Ciano had to persuade bankers and creditors to provide some financial breathing space and also reassured staff to prevent disillusionment.
-kenkwama@standardmedia.co.ke
