Announcements

GCR downgrades Mumias Sugar Company Limited’s rating to BBB(KE); Rating Watch

Johannesburg, 19 Dec 2014 — Global Credit Ratings has today downgraded the long term and short term national scale ratings assigned to Mumias Sugar Company Limited to BBB(KE) and A3(KE) respectively; with the ratings placed on Rating Watch. The rating(s) are valid until 06/2014.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Mumias Sugar Company Limited (“Mumias”) based on the following key criteria:

Mumias is the largest player within the Kenyan sugar industry, accounting for around 28% of 2013/2014 domestic production (from 40% previously). This position is supported by an extensive infrastructure that includes its cane processing plant, its own cane growing estate, and an established cane outgrower programme. Mumias has also recently established energy, ethanol and bottled water operations. Furthermore, the company is a high-profile NSE listed entity, and reports a 20% ownership by the Kenyan government (albeit that support from the state has been limited).

This established position notwithstanding, operations have been severely impacted over the past three reporting periods by numerous unique and exogenous issues that have seen severely depressed cane crushing volumes and sugar production, and have resulted in large retained losses. Exogenous to Mumias have been global sugar oversupply and depressed prices since 2011, which have increased the competitiveness and attractiveness of imports. Concomitant to this has been the relaxation of tariffs and quotas by the Kenyan Sugar Board, in line with COMESA free trade agreements. This has seen an influx of cheaper sugar into the market, compounded by continued illegal imports. Internally, Mumias has been affected by reduced sugar cane cultivation by outgrowers in response to weak prices and poaching of cane grown with Mumias sponsored inputs, as well as reduced cane and sugar yields.

The above factors saw revenue slump from a peak of KShs15.8bn in F11 to just KShs12bn and KShs13.1bn in F13 and F14 respectively. This resulted in large operating losses of KShs1.6bn and KShs2.4bn in these two years, translating to a cumulative retained loss of KShs4.4bn. Mumias reported a large rise in debt in F11 and F12 to fund capex projects, resulting in much higher debt balances over the past three years (FYE12: KShs5.4bn; FYE13: KShs6bn; FYE14: KShs5.7bn). Coinciding with the aforementioned operational challenges, this has resulted in a sharp deterioration in gearing and liquidity metrics, which has impaired the company’s debt serviceability and has seen it renegotiate terms with several debt finance providers.

GCR has noted several instances of weak corporate governance that have seen the suspension of certain senior and middle managers. Although such instances ostensibly relate to internal records, GCR awaits the results of external investigations into these matters. On the basis of these governance issues and the challenges within core operations, GCR has placed Mumias’ ratings on “Rating Watch”, and accordingly, will continue to monitor the ratings closely.

Going forward, an improvement in the ratings would only be likely if increased cane volumes and higher utilisation of capacity are reported, being necessary to return the core sugar operation to profitability. This would strengthen Mumias’ credit risk profile and debt serviceability. In contrast, further adverse internal and exogenous developments could see the ratings downgraded over the short to medium term. In this regard, negative movements in cane volumes, sugar yield, and ultimately sugar output, would likely see operating losses persist and increase financial strain on Mumias. Exogenously, an influx of regional imports into Kenya and sustained low sugar prices would further erode Mumias’ competitive positioning and could see its financial challenges worsen.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Nov/2010)

Long term: A+(KE); Short term: A1(KE)

Outlook: Stable

Last rating (Dec/2013)

Long term: A(KE); Short term: A1(KE)

Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst

Richard Hoffman

Senior Analyst

(011) 784-1771

hoffman@globalratings.net

Committee Chairperson

Eyal Shevel

Sector Head: Corporate & Public Sector Debt Ratings

(011) 784-1771

shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, August 2014

Mumias rating reports, 2010-2013

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS REPORT

Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
Liquidity Risk The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating Was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

Mumias Sugar Company Limited did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.

The credit rating/s has been disclosed to Mumias Sugar Company Limited with no contestation of the rating.

The information received from Mumias Sugar Company Limited and other reliable third parties to accord the credit rating(s) included the 30 June 2014 audited annual financial statements (plus four years of comparative numbers), Kenyan sugar industry statistics from the Kenyan Sugar Board, corporate governance and risk framework as detailed in the annual report, industry comparative data and regulatory framework and a breakdown of debt funding facilities.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

GCR downgrades Mumias Sugar Company Limited’s rating to BBB(KE); Rating Watch

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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