Announcements

GCR downgrades Mumias’ rating to BB(KE); Ratings withdrawn

Johannesburg, 10 Jun 2015 — Global Credit Ratings has today downgraded the national scale long term rating assigned to Mumias Sugar Company Limited to BB(KE) and the short term rating to B(KE); with the outlook accorded as Evolving. Concurrently the ratings have been withdrawn.

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:

In December 2014 GCR downgraded Mumias’ long term rating by 3 notches to BBB(KE) and the short term rating by two notches to A3(KE). This followed large operating losses of KES1.6bn and KES2.4bn in F13 and F14 respectively, translating to a cumulative retained loss of KES4.4bn. This coincided with record levels of debt of KES6bn at FYE13 and KES5.7bn at FYE14, resulting in a sharp deterioration in gearing and liquidity metrics, which has impaired the company’s debt serviceability. GCR also noted instances of weak corporate governance that saw the suspension of certain senior and middle managers.

Given the negative headwind, the rating was also placed on Rating Watch with a view to review the rating by 30 June 2015, once more details regarding the turnaround strategy were available. During 1Q 2015, comfort was taken from the commitment from the Kenyan Government (20% shareholder) to recapitalise the company with KES1bn, as well as indications from other shareholders that they may contribute funding through a KES3bn rights issue.

However, to date, no cash has been forthcoming, which combined with the continued difficult trading conditions, has placed Mumias in a very weak liquidity position. This has affected production, with reports of the plant being shut-down several times over the past two weeks.

The rating downgrade reflects the weakened recovery prospects for Mumias and the lack of funding for ongoing operations, while the Evolving outlook reflects the potential for further downgrades, or alternatively the potential for positive rating movement should the proposed government funding be forthcoming. Despite attempts to contact the company, GCR has not received any comments from Mumias’ management and is thus unable to gain additional insight into the company’s financial position and its future strategy. As such, the ratings have now been withdrawn.

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (Nov/2010)  
Long term: A+(KE); Short term: A1(KE)  
Outlook: Stable  
   
Last rating (Dec/2014)  
Long term: BBB(KE); Short term: A3(KE)  
Outlook: Rating Watch  
   

ANALYTICAL CONTACTS

Primary Analyst  
Eyal Shevel  
Sector Head: Corporate Ratings  
(011) 784-1771  
Shevel@globalratings.net  
   
Committee Chairperson  
Richard Hoffman  
Senior Analyst  
(011) 784-1771  
hoffman@globalratings.net  

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015

Mumias rating reports (2010-2014)

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

capital The sum of money that is invested to generate proceeds.
Corporate Governance Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Credit Rating Agency An entity that provides credit rating services.
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.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
Downgrade The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
LC An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.
leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
Long term rating A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.
National Scale Rating The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
OTC An OTC market or trade is one conducted directly between dealers and principals rather than via an exchange. 
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Rating Watch Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.
Redemption The repurchase of a bond at maturity by the issuer.
REPO In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
Rights Issue One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held. 
risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short term rating A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
Under Review Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.
   


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.

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 ratings above were not solicited by, or on behalf of, the rated client, and therefore, GCR has not been compensated for the provision of the ratings.

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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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