Kenya’s leading retail chain; Nakumatt Holdings has secured KSh500 million through a short- term loan in a deal expected to improve its liquidity and pave the way for entry of a deep-pocketed strategic investor into the business.
The transaction was disclosed by investment advisory firm Dry Associates, which arranged the private placement last quarter. The retail chain sought for the facility through an insured loan and got all it wanted, signaling investors’ confidence in its ability to repay the debt.
The loan option move was majorly as a result of sharp rise in supplier debt that has constrained its cash flows, leading to delays in paying suppliers. Part of the new capital is set to retire some of the outstanding debt that has earned the retailer a credit rating downgrade.
South Africa’s Global Credit Ratings (GCR) recently assigned Nakumatt a long-term rating of BB- down from BB, indicating a weakened ability to meet outstanding financial obligations.
“The rating downgrade reflects the notable deterioration in Nakumatt’s credit risk profile. Growth of the business has been highly leveraged, with the ever-growing working capital and capex requirements having been largely funded through short-term debt,” said GCR in the credit report.
The rating agency noted that Nakumatt’s debt burden had quadrupled in the last four years to Sh18 billion up from Sh4.7 billion in 2012 “placing unduly high pressure on the group’s gearing and liquidity position, with funding limits having largely been reached.”
The GCR disclosed it did not factor in plans by the regional retailer to sell a minority stake to new investors during the rating process as such previous plans had fallen flat.
Nakumatt’s gross sales grew by nearly a tenth to Sh51.6 billion in the year ended February 2015 compared to Sh48 billion a year earlier.
Surging finance costs, however, ate into the supermarket’s earnings– with gross profit plunging to Sh305 million in the review period.
Dry Associates has specialty in corporate finance and private wealth management.