The ability of cement maker Athi River Mining to pay its Sh14 billion debt has been cast in doubt after a South African rating agency downgraded its credit status to junk.
Global Credit Ratings (GCR) downgraded ARM on Friday last week to default status of DD over both its long-term and short-term loans.
The company has failed to make interest payments on a commercial paper.
The junk status is a rating given to a firm that has defaulted or is likely to default on all or a substantial amount of its debt obligations as they fall due.
“Global Credit Ratings has downgraded the national scale debt ratings for ARM Cement Ltd (ARM) to DD(KE) in both the long-term and short-term. Concurrently, the commercial paper rating has been downgraded to DD(KE). The downgrades follow GCR’s observation that ARM has defaulted on scheduled interest payments,” said the firm.
According to its 2017 annual report, ARM is expected to settle a massive Sh13 billion in debt within the year and Sh1 billion thereafter over a period of five years.
The firm owes Sh6.5 billion in bank loans, an improvement from Sh7.9 billion in 2016 and Sh1.4 billion to Aureos. It also owes a corporate bond of Sh1 billion and Sh771 million in commercial papers.
A strain on the cement maker’s books can, however, be seen in its leaning to overdrafts, which increased from Sh2.2 billion in 2016 to Sh4.5 billion last year.
The debt also carries a currency risk since its dollar-denominated loans stand at Sh8.8 billion ($86.1 million) while the Kenya shilling debt stood at Sh4.4 billion as at December last year.
The firm expects to get back Sh22.9 billion from related companies out of which it expects Sh1 billion will not be recovered and has already provisioned for the loss.
Another contingent liability is a claim by the Kenya Revenue Authority, which slapped the cement maker with a Sh2.6 billion tax bill.
ARM has fallen deeper into the red, posting a Sh6.9 billion loss in 2017 from a loss of Sh3.1 billion in 2016. This puts into question its ability to meet its short-term obligations.
GCR noted that there were several initiatives underway to stabilise the ARM’s financial position and help it return to profitability.
The rating may, however, be rebased once the proposed refinancing transactions are completed and all past-due debt obligations, as well as penalties, are settled or appropriately restructured.
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