Portland nears financing deal for Sh3bn debt

• Kenya’s second largest cement maker in talks with CFC Stanbic for short-term hedging against currency swing, which cost it Sh1 billion in 2008

East African Portland Cement Company is set to flesh out a foreign currency hedging agreement on its long-running yen-denominated loan.

Managing Director John Nyambok says a facility to cushion Portland’s earnings against fluctuation should be in place by June if approved by the board.

Kenya’s second largest cement maker took the Sh1.7 billion loan — part of a larger bilateral package comprising parastatals including Kenya Electricity Generating Company, Kenya Broadcasting Corporation and Moi International Airport — in 1990 and is unlikely to wriggle out of the deal before 2020 when the credit tenure runs its course.

The State-to-State agreement between Kenya and Japan has made EAPCC something of a bellwether of the forex market; in a good year, meaning when the shilling is strong, it makes unrealised forex gains. Conversely, in a bad one when the shilling weakens, the bottom line bleeds as it makes higher provisions for the biannual payout.

Last year captures the latter scenario. Despite chalking up an operating profit in excess of Sh500 million, the listed company ended up in a book loss after making Sh1 billion provision for the fluctuation.

Consequently, it returned a pre-tax loss of Sh489 million in the half-year ending December 31, 2008, despite an 8 per cent growth in revenues. In the previous comparable half, the firm made a pretax profit of Sh463 million.

At the beginning of 2008, Sh62 was being exchanged for 100 yens but the situation reversed as the year wore out to end at Sh83. This represents 34 per cent decline in the value of the shilling and equal rise in the Japanese loan principal and interest.

Eng Nyambok, only too keen to get the Japanese Bank for International Co-operation (JBIC) loan off Portland back, is in advanced talks with CFC Stanbic for short-term hedging. Typically, these cover one or two years. The merged banking group is part of the South African Standard Group conglomerate, which maintains a hedging division at its London office.

Liquidation of the loan

The company took the loan of Sh1.7 billion in 1990 at a concessional rate of 2.5 per cent but despite servicing the loan since 2000, it still has Sh3 billion to go.

Owing to the currency fluctuation, practically the yield is around 8 per cent. Despite previous bids by EAPCC to prevail upon Treasury to facilitate liquidation of the loan, nothing concrete has come out of it largely because the Japanese have never been keen on receiving money earlier than stipulated under the loan agreement.

“I do not want this loan to continue appearing in our books,” said Eng Nyambok who suggests a prudent way out of the forex shackles could be to deposit the yens in an account and wipe it off the books. Indeed, he says past managers at the Athi River-based company missed an opportunity for resolving the matter at a time when the Kenya shilling was strong.

Right now, the hedging arrangement is premised on the assumption that Sh93 to 100 yens is the worst-case scenario. A currency hedge agreement gives the underwriting company cash or docks the same depending on which side the currency swings.

Currently, the direction the shilling may take against the yen — now at Sh84-plus to 100 yens — remains unclear and largely dependant on the dollar-yen exchange rate. Portland pays the cash in March and September yearly.

In an interview last week at its Athi River headquarters, Mr Nyambok said the company was simultaneously exploring a hedge on its oil purchases as it seeks to whittle down operating costs. Interestingly, this comes at a time Portland is moving from fuel oil to coal in a shift its officials say would cut up to 30 per cent on its energy bill.