Once profitable firms battle to survive under crushing debts
By Patrick Alushula | June 24th 2018
It was Benjamin Franklin, a renowned polymath and one of the founding fathers of the US who opined: “Rather go to bed supperless, than rise in debt.”
But for many companies, chasing after capital to bolster expansion programmes or sometimes to pay off maturing debt and relieve the business of cash flow strains, has tilted them into the debt trap.
Unluckily, for some, they are now teetering at the financial cliff edge as piling losses conspire with maturing debts to send them plunging into the abyss. The managements have launched new strategic plans, trimmed the workforce and even pleaded with creditors to give them another chance but the debt trap now appears like a bottomless pit.
And returning to the glory days appears key on the minds of their respective CEOs yet so far in the numbers contained in the financial statements. Included in this group are listed and non-listed firms, doing business across sectors.
Before Nashon Aseka, the immediate former Managing Director of Mumias Sugar Company was shown the door, he once appealed for divine intervention to help get the State-owned sugar miller out a Sh20 billion debt trap.
“And please pray for us to help Mumias get up,” he told The Standard in a phone interview in March.
“If the Government gives up, then banks also give up. Chances are that we shall struggle a little and eventually close because the funds we are generating are not enough to pay farmers and other creditors,” Aseka said.
He hardly lasted for another three months before being ousted, becoming yet another casualty to vacate Mumias’ unforgiving C-suite. Dr Evans Kidero, Peter Kebati, Coutts Otolo and Errol Johnston have all been on that hot seat in the past five years.
But the sorrowful state of companies stuck in debts and losses is not a preserve of the Western Kenya-based miller alone.
Other once lucrative firms fighting for survival thanks to soaking up debt include Uchumi Supermarkets, Athi River Mining (ARM) Cement, Express Kenya, Nakumatt Supermarkets, Kenya Airways (KQ), and TransCentury and its subsidiary-East African Cables.
- Uchumi Supermarkets
Once hailed as Kenya’s success story in retail marketing, the listed supermarket can only reminisce about its glory days.
Known in Kenya, Uganda and Tanzania as the ‘home of value’, the Nairobi Securities Exchange (NSE)-listed firm found the going tough as cases of dubious accounting, theft and debt threatened to end its success story.
Former CEO Jonathan Ciano’s exit in 2015 painted the picture of a boss who pulled the firm from the abyss in June 2006 when it was suspended from the NSE for five years, only to plunge it into survival mode again.
Uchumi now has a debt to the tune of Sh4.8 billion. Its workers are going for months without pay and it is also struggling to maintain its branches. It controversially pulled out of Uganda and Tanzania and scaled down operations in Kenya, including exiting the prime Sarit Centre branch.
Having had a peek at the firm’s manipulated books, immediate former CEO Julius Kipng’etich, who left in December last year, had said no magic could turn around the retailer if the debt issue was not resolved.
“If you look at the books of Uchumi, you can see the extent of the hole (Sh4.5 billion). Without sealing it, you can’t do much, however ambitious you are,” he told Weekend Business in July last year.
Despite having sold sizeable parcels of land, closed some stores, retrenched 2,230 workers and gotten a Sh500 million loan from the National Treasury, the pit remained deep.
As at close of last year, Uchumi posted a Sh1.7 billion loss even as current liabilities outstripped current assets by Sh6.2 billion, making it hard to service short-term obligations.
Suppliers have become wary of delivering goods to the retailer. In 2016, some of them moved to court seeking orders to wind up the supermarket for failing to service debts. But Kenya Commercial Bank and United Bank for Africa, which were then owed Sh2.5 billion by the firm, did not favour the move.
2. Athi River Mining (ARM) Cement
Deloitte auditors are now casting doubt on the ability of the Athi River-based cement maker to continue being in business after losses widened by three times to Sh6.5 billion, condemning it to its third straight year in losses.
Its debts are in excess of Sh10.8 billion. Current assets have exceeded current liabilities by Sh13.47 billion and losses have accumulated to Sh2.95 billion, threatening to send it out of business.
The directors say they are confident of restructuring the debts and remain in business but its auditors argue that they don’t have sufficient evidence to show that the initiatives will help the firm repay the maturing debts.
“The company intends to further reduce current debt levels and has initiated a process to restructure the balance sheet with view to reducing the short term nature of the debt,” the company says.
Leonard Mususa’s resignation from the board on Thursday made him the fifth director to exit in under six months. Its chairman, Rick Ashley, also bolted.
The firm’s entry into Tanzania proved to be its Achilles heel, sending it into losses as debts piled up. More than seven banks are on its back for repayments. Raising more money to repay the debts seems to be its biggest headache now.
3. Nakumatt Supermarkets
Landlords want their rent. Suppliers want their arrears and customers deserve their favourite goods. But Nakumatt, once a beautiful story in the retail sector, has neither. It can only shut its branches.
Atul Shah and his brother know too well how dehumanising debt can be. Together, they once worked hard to pay off their father’s Sh1.2 million debt after he sunk into the shame of bankruptcy.
But fast forward to 2018 and the very business they built to glory is under threat of going down, surprisingly, to debt. About 120 creditors are knocking at Atul’s door for a sum of between Sh30 billion and Sh40 billion in secured and unsecured debt. Sadly, he cannot single-handedly rescue his business from the debt like he pulled out his father from the trap of bankruptcy.
Nakumatt has shut down more than one-third of its 63 branches spread across the east African region but it is still not out of the woods yet. Having battled ugly fights in and out of the courts, it is now under administration.
At one point, about 11 banks including Standard Chartered, KCB, Stanbic, NIC, Barclays and Diamond Trust were all on Nakumatt’s case for their dues but its assets were too meagre to sustain the onslaught.
Atul’s woes are far from over as he faces an investigation over the loss of Sh18 billion worth of stock.
Peter Kahi, Nakumatt’s court-appointed administrator, told Reuters that he would seek a forensic investigator to investigate why Atul wrote off stock worth Sh18 billion in May.
“I don’t think it is something which happened within a year or a day. Maybe it is a build-up of so many years. Because 18 billion is quite a big sum, just to occur in one day,” Kahi remarked.
He continued: “Of course that is a big write-off, which according to them (the company) it’s basically pilferage, shrinkages and theft by staff and what ... But now it is for him to explain, since he was the chief executive officer.”
4. TransCentury PLC
Infrastructure development firm TransCentury is looking for fresh capital after four consecutive years of losses left it in a negative working capital position. The auditors think that there are material occurrences that could cast doubt on its ability to remain in business.
But during its glory days, the firm, with three operating divisions spread across 14 countries in East, Central and Southern Africa, was a money-making machine that exploded from just Sh29 million in assets to billions.
Then the dark period set in, starting in 2014 when it succumbed to losses. For the year ended December 31, 2017, the firm’s losses grew five times to Sh4.3 billion partly due to a one-off cost of Sh1.5 billion that its engineering subsidiary paid out after losing a law suit.
This even as liabilities falling due in the next 12 months outstripped the available resources for the same period by Sh8.5 billion. The management, just like that of ARM, is trying to restructure debts to lengthen the maturity period and shed off some pressure.
“We have come a long way. There were some mistakes but TransCentury is now a business that knows how not to do some things,” says CEO Ng’ang’a Njiinu. “The debt profile was not optimal for the business. It is not good business to fund-raise to pay debt.”
Njiinu explained that the company has been through a rocky and painful moment and getting out of it will be a multi-phased intervention strategy as opposed to a ‘one night thing’.
5. East African Cables Limited
A subsidiary of TransCentury, East African Cables Limited, is also stuck in a debt trap. KPMG auditors have expressed doubt over the ability of the cable maker to continue being in business after it slid further into losses and working capital difficulties.
For the year ended December 2017, net losses widened by 13.8 per cent to Sh662.8 million, marking the third straight year for the firm to post losses.
But against this loss and falling revenues was piling debt that now puts pressure on the company. According to KPMG, the loss and the fact that the company’s current liabilities exceed current assets by Sh1.59 billion casts a ‘material uncertainty related to going concern’.
A big chunk of the company’s current liabilities is a short-term bank loan of Sh3.055 billion. It also has a bank overdraft of Sh391,000. Trade and other payables amount to Sh888.2 million. This is putting pressure on its ability to unlock orders and generate revenue.
The group says that it has focused on a turnaround strategy to ensure stringent credit management, revenue enhancement and improved efficiency to reverse its fortunes.
6. Kenya Airways
The national carrier has its former-CEO-turned-consultant Mbuvi Ngunze to thank. Debts, losses and strikes all conspired against the airline, almost bringing it down.
For about three years, Ngunze was the man at the helm of one of the most scrutinised companies in the country yet he sometimes had no idea where money to fuel the airline’s fleet would come from.
As he walked out, having battled in court with banks on restructuring debt, Ngunze summed up his job as the ‘toughest assignment I have ever done’.
As at the end of financial year ended March 31, 2017, KQ’s debt stood at Sh142.34 billion. It closed that financial year owing Citi Bank and JP Morgan Sh78.9 billion. It owed a further Sh23 billion to 11 local banks.
In court documents, the airline pleaded with the local banks to support debt restructuring since overseas banks had carried out an inspection of its aircraft in preparation to repossessing them if KQ delayed to strike a restructuring plan.
“It has been a big task. It is probably the most complex financial restructuring ever done in Kenya. First in terms of its size and secondly, the number of stakeholders involved,” Ngunze said after he led KQ in a successful debt restructuring exercise that saw banks convert their loans into equity.
The airline remains in the red but the restructuring has given new CEO Sebastian Mikosz some breathing space.
7. Express Kenya Limited
Once a success story in the logistics sector, Express Kenya is now headed for a takeover after years of losses and mounting debt. As at the end of December 2017, the firm posted a loss of Sh90.3 million, slightly better than its 2016 loss of Sh96.9 million.
The company last made a profit in 2013 before swinging into a series of losses. Shareholders’ funds have been depleted and is now in the negative zone of Sh67.16 million with borrowings hitting Sh185 million. It has short-term loans of Sh62.3 million and owes suppliers about Sh88 million.
This has led to a negative working capital of Sh65.2 million, meaning that servicing such short-term obligations will be strenuous. This is a worse position than in 2016 when current liabilities had surpassed current assets by Sh16.9 million. Its auditors, PKF Kenya, have raised the red flag on the ability of the company to remain in business.
“In light of all this, the company has had to restructure its business strategy and in the process, has had to retrench more of its workers in a move to rein in on its recurrent expenditure,” said CEO Hector Diniz.
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