Firms flee rating agencies to avoid books scrutiny
By Otiato Guguyu | June 24th 2018
When Bank of Africa Kenya withdrew its commitment to be scrutinized and graded by South African firm Global Credit rating, their debt position was questioned.
GCR had watched as the lender’s long term rating of A-(KE) and short term rating of A1-(Ke) move from positive in 2012, stable in 2015 to negative in August 2016.
The lender withdrew from the ratings agency. Coincidentally, five months later, the bank announced that it will close 12 of its 42 retail branches, subject to approval from the Central Bank of Kenya.
The bank reported a profit of Sh10.4 million in 2016 then improved to Sh67 million last year. BoA says the withdrawal was part of wider efforts to cut costs and remove duplicity since the Group Holding Bank was already being rated.
“Bank of Africa Kenya withdrew from the GCR rating being a strategic move as its majority shareholder BMCE Bank of Africa is rated by international agencies. This is a commercial decision meant to avoid duplication of functions,” BoA said in a statement.
Unfortunately, BoA is in good company. Many Kenyan companies are no longer comfortable to let rating agencies pore through their books. Firms have resorted to avoid adverse ratings from the South African ratings agency.
A review of recent trends shows a damning trend of Kenyan companies opting to leave the agency as they face poor scores and their fortunes ultimately nosediving shortly after.
Over the last five years, 14 companies have withdrawn their ratings at GCR, some of which had been cited by the agency for poor outlook.
In fact, half of them quit in 2016 with 6 firms deciding they no longer want to have the review. Chase Bank, Bank of Africa Kenya, Fusion Capital Ltd, Industrial and Commercial Development Corporation (ICDC) and Shelter Afrique have all ceased to participate.
Cannon Assurance, Car and General, East African Cables, Kaluworks, KenolKobil, Mumias Sugar Company, Nakumatt Holdings, Real Insurance and Saham Assurance Company Kenya Limited have also left.
Media reports on GCR grading scores have been the closest indicators of troubles that have been hitting local firms, acting as a reliable thermometer to their fortunes and debt positions.
In December, Real People Investment Holdings, which issued a Sh1.6 billion bond in 2015 was downgraded by GCR over ‘strong possibility that the group will breach its Capital Adequacy Ratio debt covenant in the near term, and/or fail to meet existing debt obligations’.
“This negative rating action primarily reflects a reduction in the servicer’s financial strength assessment following GCR’s recent downgrade of Real People’s issuer rating to CCC (ZA) from BB+ (ZA),” said GCR.
The South African credit only microfinance subsequently netted a loss of Sh232 million for the half year ending September 30 compared to a loss of Sh199 million reported in the same period during the last financial year.
Athi River Mining, which is currently facing mounting debt pressures has opted to stay put. It will be reviewed by the ratings agency which will assess its books next month.
In January, ARM Cement convinced the ratings agency to give them five months to get their act together. This was based on restructuring and offsetting certain assets including its non-cement subsidiaries which are however yet to be closed.
They now face a downward review on the credit score which may sink the firm to an even worse position in terms of attracting new finances. “Commercial Paper rating has been affirmed at B(KE). The ratings have been placed on ‘Rating Watch’ and are valid until July 2018,” GCR said.
GCR downgraded ARM’s credit rating in July 2017, as a result of the substantial financial strain that had materialised after the tactical error that begun with heavy capital investment in Tanzania funded by huge loans.
Another firm in which the ratings agency has played almost prophetic fortune telling was Nakumatt Supermarkets which has now exited the ranking.
In 2015, the retailer was first flagged by GCR when the ratings firm revealed that Nakumatt’s total debt had more than tripled in four years to Sh15 billion from Sh4.2 billion in 2011 owed to lenders, suppliers and manufacturers.
This insurmountable size of debt would eventually turn unsustainable when it hit upwards of Sh40 billion two years later and finally collapsed the firm into receivership.
Another debt troubled firm which opted out in 2017 is Shelter Afrique. The firm was cited when GCR said the housing lender’s long-term rating has been downgraded to B (KE) from A+(KE) while short-term rating has fallen to B(KE) from A1(KE).
“GCR estimates that the company’s available cash resources and expected inflows are inadequate to cover scheduled repayments on borrowings of Sh11.2 billion this year,” it said.
The firm has however managed to rally shareholders to pump in additional capital and restructured its business and management. It has agreed with its creditors to renegotiate short term loans clearing it of a possibility of default.
East African Cables whose auditors KPMG questioned their viability to continue being in business after the company’s net losses widened by 13.8 per cent to Sh662.8 million in the financial year ended December 31, 2017 also left GCR in 2016.
When it left, its outlook was negative and that may have manifested in its books where company’s current liabilities exceed current assets by Sh1.59 billion casting a “material uncertainty related to going concern.”
The firm has been struggling in a very competitive environment as Chinese imports flood the market. This has kept the firm in the red for the last three years.
Mumias Sugar withdrew its ratings as far back as 2015 and the cash strapped miller has been in the doldrums ever since.
Ratings withdrawal does not necessarily mean bad fortunes portend a firm. Kenya’s biggest lender Kenya Commercial Bank opted out of the grading after it consistently retained AA(KE) rating since it was initially assigned in June 2013. KCB says this was a normal business decision.
This was despite GCR latest rating citing the Bank as well structured, governed and capitalised to play a stronger role in East Africa’s economic transformation, citing KCB’s resilient earnings performance.
“GCR has affirmed and withdrawn KCB Bank Kenya long-term and short-term national scale ratings of AA(KE) and A+(KE) respectively; with the outlook accorded as stable,” the agency said.
However, the rise in number of firms opting not to be rated indicates a wider market problem. After the decade of boom between 2003 and 2012 of President Mwai Kibaki era, firms became very profitable, issued corporate bonds locally and abroad.
In fact in 2011, Kibaki era investment firm TransCentury went ahead and issued a $54 million bond through one of its subsidiary, TC Mauritius Holdings Limited with foresight that the creditors would convert part of the debt into ownership of a more profitable business a few years down the line.
When the bond matured, the firm was unable to meet its dues and it took New York-based private equity fund Kuramo Capital to save it in exchange for 25 per cent stake and a haircut to the investors.
Over the last five years, the profits of most Kenyan companies have shrunk by a third and the 56 companies whose results Weekend Business analysed, have lost Sh61.27 billion from their earnings.
Profit warnings have become so prevalent that for the year ending December 2017 about 13 companies said their profits will fall short 25 per cent of their previous earnings.
But as masters in surviving the worst period some of the companies have resorted to delaying the profit warnings attracting the ire of the market regulator.
“The authority notes that issuers who issue their profit warnings either at the same time they release their audited accounts or immediately prior to releasing their audited accounts shall be deemed to be in breach of the listing requirements,” the Capital Markets Authority said in a circular last year.
Even among small businesses, Kenyans still prefer not to be rated despite the huge opportunities that a credit score can offer a company.
Metropol Group MD Sam Omukoko said if the law allows all financial firms to share data including state funds then they will be able to capture very many businesses and allow them to have a credit score they could provide to lenders for access to cash.
Firms shy away
“Many of the businesses are still locked out of the credit market and many of them go to these funds, Uwezo, Youth and women development and they get these loans and disappear. So there is no radar we can use because those funds are not sharing data with us, we do not know what these guys are doing,” Mr Omukoko said.
Even as firms shy away from getting international credit ratings in these uncertain times, the Metropol MD says companies, like people should not shy away from them but rather focus on building their scores back up whenever the scores deteriorate.
“With a score, a bank does not need to tell you that you need to run an account with them for six months that is unnecessary because the score has that history. I should be able to walk into a bank and walk out with money and that is what mobile loans are doing,” he said.
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