Banks take control of Athi River Mining over Sh15 billion debt

Athi River Mining Cement Company
Commercial banks have pounced on what is left of Kenya’s second-largest cement maker Athi River Mining (ARM) after they took control of the firm seeking to recover Sh15 billion owed to them.

Nigeria-headquartered UBA Bank, which led the onslaught, appointed joint administrators from audit firm PricewaterhouseCoopers (PwC) on Friday.

The lenders wrestled control of the firm from the new board set up just last week, making it the latest company to face the prospects of liquidation.

It also means that the Capital Markets Authority (CMA) must now suspend the firm’s shares on the Nairobi Securities Exchange (NSE) before trading starts tomorrow.

The appointed administrators, Muniu Thoithi and George Weru, are experienced receiver managers for family-owned businesses facing financial troubles.

Mr Weru said the main task at hand is to take control of the firm after which they will conduct a thorough analysis of its financial health.

“The appointment was yesterday (Friday). Now we are planning the takeover and once this is done, we will assess the financial position of the firm to determine the next course of action,” he said in an interview with Weekend Business.

Weru said it is still too early to give a proper way forward for the firm but he said they will evaluate all options, among them seeking for a strategic investor, and will only go into liquidation as the last resort.

“We have already engaged some stakeholders among them the NSE, CMA and its directors and shareholders,” he said.

He said the administration process was initiated by UBA Bank but all the lenders with a charge on the firm are in support.

ARM’s latest annual report shows that the firm owed at least nine different banks in excess of Sh14.4 billion as at December 2017.

In the notice appointing the administrators, PwC said the action was a legal business rescue process that the stakeholders of the company are required to consider it is faced with financial difficulties.

Better outcome

“The primary objective of administration is to enable an administrator, a licensed insolvency practitioner, to explore possibility of rescuing the company either as a going concern or for achieving a better outcome for the creditors than would likely to be the case if the company were liquidated,” read the notice.

PwC says the administrators will take control over the business assets and the management of the affairs of the company without personal liability.

“By virtue of the administration, the powers of the directors of the company in terms of dealing and or transacting with the company’s assets have ceased, unless with express permission of the administrators,” said the audit firm.

Last week, ARM Chief Executive Pradeep Paunrana was ousted following a management shake-up engineered by CDC Group.

CDC, which owns a 42 per cent stake in the listed cement maker, had appointed Linus Gitahi to take over as chairman.

The latest development means Mr Gitahi, an experienced media manager, served the shortest time as chairman of a listed company in Kenya.

The stricken firm’s subsidiary, ARM Cement, owes the biggest debt at Sh10.8 billion, followed by Maweni Limestone (Sh3.5 billion) while its Rwandan subsidiary owes lenders about Sh110 million. 

Stanbic Bank is one of the biggest financiers of the firm, having advanced its various subsidiaries more than Sh3.3 billion by the end of last year.

The bank gave ARM the biggest overdraft facility among all lenders knocking at its door having allowed the firm to draw up to Sh1 billion.

African Finance Corporation had given the firm a total of Sh4.6 billion by the end of last year. Other lenders include Barclays Bank of Kenya (Sh229 million), Guaranty Trust Bank Limited (Sh550 million) and UBA Bank (Sh340 million).

Besides bank loans, the firm also has a commercial paper of Sh771 million, an income note of Sh1.4 billion and a corporate bond of Sh1 billion in other borrowings.

Other banks that have given money to its subsidiaries include PTA Bank (Sh381milion), Development Bank of South Africa (Sh781million), Canara Bank (Sh20 million) and Standard Bank, Mauritius (Sh824 million).

Signs that the administration was coming became clear after the firm announced its financial results for last year that revealed it had sunk into the worst hole in its history.

Its health deteriorated so fast in the last one year, plunging from Sh2.8 billion loss in 2016 to a massive Sh6.5 billion, its biggest loss in over a decade.

To put the last nail on its coffin, ARM’s own auditors, Deloitte & Touche, refused to issue an opinion on the financial statements on grounds that they were not certain that the company would still be in existence in the next one year, what accountants refer to as a going concern.

In the red

The firm, started by the Paunrana family, has been in the red for the past three financial years.

This loss-making has eaten the firm up so much that even if all its assets were sold today -- among them the factory, plant and equipment -- it would not get enough money to pay off its debts.

The cement maker’s current liabilities exceeded its current assets by Sh13.4 billion. It also has additional accumulated losses amounting to Sh2.9 billion.

“These conditions combined with the historical performance of the group indicate that a material uncertainty exists, which may cast significant doubts on the group’s ability to continue as a going concern,” the auditors said.

Analysts have described the situation as ‘distressing’ given that ARM was surviving on overdrafts that more than doubled to Sh4.4 billion last year.

“The cement manufacturer’s liquidity ratio at 0.22 is distressing, indicating that the company can barely meet its immediate obligations - current liabilities (Sh17.2billion) outweigh current assets (Sh3.7 billion) by Sh13.5 billion,” said research analysts at Standard Investment Bank (SIB).

All efforts to resuscitate ARM and get it out of the financial intensive care unit it sunk into in 2015 seem to have hit a dead end. Unless a miracle happens, it is just a matter of time before it switches off its plant in Athi River.

It has made numerous changes to its executive suite including those done last week, to try and inject new ideas to help change its course.

To try to remain afloat, the firm sold off its non-cement business, Mavuno Fertilisers to Omya (Schweiz) AG and Pinner Heights Kenya (related to the main anchor shareholder of ARM). 

The transaction, that was to be completed in January 2018, was valued at about Sh1.6 billion, but the cash appears to have been swallowed without a burp and is an effort that came a little too late.

Analysts say that asset disposal is the most viable option now for ARM, and could involve a look at the Tanzania unit.

“We think investors might have oversold the stock, despite its distress situation – but a solution has to be found soon for its key assets,” SIB says in its latest report.

The administration option has been on the cards for some time now as banks gave the firm time to put its house in order.

But as the company ran around looking for the best option to rescue the business, lenders’ patience appear to have been exhausted.

The new administrators have already communicated to staff that every aspect of business can now only be conducted with their authority and have promised to pay the August salaries.

Seek funding

But perhaps the most important task for the administrators is to seek funding and steady the ship.

The other option the administrators have will be to get a White Knight, a deep-pocketed individual or company who makes an acceptable counter-offer for a company facing a hostile takeover bid.    

Mr Paunrana blamed the state of affairs on costly miscalculations he made when he invested in the Tanzanian market.

He said his firm was caught up in the battle between two cement giants -- Dangote and Heidelberg Cement -- that spilled over from West Africa.

“In West Africa, there are many overlapping countries where Dangote has moved into the traditional market of Heidelberg, and Dangote’s strategy has always been to drop the price and hope for a market grab immediately,” Paunrana said.

But in Tanzania, it did not work out for Dangote because their plant is located in the country’s lower region whereas the main market is in Dar-es-Salaam.

Heidelberg’s plant, which produces Twiga Cement, is located in Dar -- where ARM is also located -- so it had no transport costs.

This left Dangote on the losing end of the cement price war but they were not going to go down without a fight. Heidelberg kept on dropping the price from about $120 (Sh12,106) per tonne in 2014 to $100 (Sh10,088) in 2015.

By 2016, when CDC put money in ARM, the price had shrunk to $88 (Sh8,877) and by end of May 2017, it was down to about $60 (Sh6,053).

“This was a battle of giants and we were all affected. At $60 (Sh6,053), we are not making any money despite the fact that we were struggling with production because of lack of coal,” Paunrana said.   

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Athi River Mining (ARM)UBA BankPricewaterhouseCoopers (PwC)Nairobi Securities Exchange (NSE)Capital Markets Authority (CMA)