Global Credit Ratings has downgraded the long term credit rating assigned to East Africa’s largest retailer Nakumatt Holdings Limited to BB- citing deterioration in the company’s credit risk profile.
The agency notes that the business has been highly leveraged, with the ever-growing working capital and capex requirements having being largely funded through short term debt. This has seen Nakumatt’s total debt burden grow rapidly over the review period from KES4.7 Billion as at full year ended 2012 to a substantial KES18 during the half year of 2017.
GCR said this was putting high pressure on the group’s gearing and liquidity position, with funding limits having largely been reached.
To ease the severe funding strain, Nakumatt is in the midst of finalising a transaction with a potential minority equity investor. This is expected to see substantial capital injected into the business imminently, which will be used to settle a large portion of outstanding short term facilities.
Once the funds have been received, the group will also embark on a process of restructuring the remaining debt facilities to longer maturities, with the additional borrowings to be used to pay long-overdue creditors.
“Nakumatt benefits from a strong brand heritage with its entrenched position supported by an extensive store network, supplying a plethora of FMCG brands, as well as durable and semi-durable products. Whilst revenues may be pressurised (as new store openings may be scaled back until the funding restructuring is finalised), margins are expected to be largely upheld by greater operating efficiencies and various cost control measures undertaken. Once the balance sheet reflects a much more sustainable position, the benefits of interest savings will also support bottom line profitability and debt serviceability.” Noted GCR.
According to GCR, any complications or delays in completing the proposed equity transaction and debt restructuring efforts could place further downward pressure on the ratings.