Chandaria’s pan making firm hit by credit downgrade

Kaluworks, a manufacturer of aluminium utensils and roofing sheets, has suffered a credit rating downgrade as the high level of debt on the company’s books weighs on its creditworthiness.

South Africa’s Global Credit Rating company, which is authorised by the CMA to rate Kenyan firms, gave Kaluworks a BB rating early this month, down from BB+ awarded in September last year.

Kaluworks, which was founded in 1929, is part of billionaire industrialist Manu Chandaria’s Comcraft Group, which has a manufacturing presence in over 15 African countries.

Its principal shareholders are listed as the Kenya Aluminium and Industrial Works Limited (72 per cent) and Clovis Aluminium SA, which owns 28 per cent of ordinary shares.

GCR indicated that the rating outlook is stable.

In November last year the firm raised Sh1 billion through a corporate bond sale. It is said to be looking for a private equity firm to inject funds into the business and help push through its expansion plans which have caused a strain on its books.

“An investment by an outside partner or an equity injection by shareholders is considered critical to alleviate the current funding constraint,” reads part of the rating report by GCR dated November 7.

GCR works in partnership with its Kenyan affiliate, Metropol East Africa. Kaluworks’ total debt stood at Sh4.6 billion at the end of 2012, compared to Sh1 billion in 2008.

The sufuria (cooking pot) maker enjoys a market share of more than 60 per cent in Kenya, more than 57 per cent in Tanzania, over 63 per cent in Uganda, and above 50 per cent in Ethiopia and over 50 per cent in Rwanda.

Kaluworks manufactures bowls, basins, buckets, cooking pots, sauce pans, cans and other cookware, as well as aluminium roofing sheets.

The borrowed funds, including the Sh1 billion corporate bond issued last year, have been used to fund capacity expansion.

A Malaysian-based firm, GuarantCo, had guaranteed up to 50 per cent of the bond. Kaluworks is said to be weighing the options of whether to convert the loans to a dollar-denominated debt, which attracts lower interest rate, and also converting short-term private notes into long-term credit facilities.

The bond has a maturity period of seven years and will pay investors a 14 per cent, semi-annual fixed rate of return.

GCR, however, warns that the debt restructuring will not address Kaluworks’ core problem of being in excess debt given its gearing ratio of 287 per cent.

“If not adequately addressed, the high level of debt will continue to place significant liquidity pressure on Kaluworks and severely restrict operational ability. This would likely lead to further rating downgrades,” warns GCR.

Injected capital

Shareholders of the cookware manufacturer injected additional capital through rights issues in 2010 and 2011.

Kaluworks is said to have posted a net loss in the seven months to July, attributable to high costs of financing. The capacity expansion has helped the company report an increase in revenues with production volumes going up.

GCR, however, notes that all operating profitability of the company has been consumed by onerous interest charges leading to depressed net profits being reported from 2010 to 2012.

Kenyan businesses have been hit by high interest rates since 2010 following a sudden weakening of the shilling that prompted the regulator to sharply increase its policy rate.

The Central Bank of Kenya has been sending signals to lenders to lower interest rates having cut its indicative rate by more than half in the last year, but banks have been slow in responding.

In 2011 Kaluworks reported a net profit of Sh36 million, having paid out Sh226 million in financing costs which was its biggest expense item.