How Nakumatt found itself trapped in financial crisis

The downgrade meant the company’s credit outlook had been placed under “watch” with the direction of the business unclear or not fully ascertainable in the immediate future.

In notes to support the rating, Sheri Few, the Global Credit Ratings senior credit analyst, said the downgrade reflected a notable deterioration in Nakumatt’s credit risk profile that had partly resulted from large expenditures towards servicing short-term debts acquired to pursue an ambitious expansion drive towards the end of 2010.
“Growth of the business has been largely funded through short-term debt. This has seen Nakumatt’s total debt burden grow rapidly, placing undue pressure on the company’s liquidity [cash flow] position,” he said.

Details obtained from Global Credit Ratings indicate that the company’s debt has grown substantially from Shs159.8b (Ksh4.7b) in 2012 to Shs612b (Ksh18b) in the first half of 2017, which subsequently has had a negative bearing on the company’s already faltering balance sheet and stressed cash flow.

Nevertheless, Sheri Few, according to the rating notes, was opportunistic that Nakumatt would pull itself out of the financial conundrum given that it had shown willingness to sell at least 25 per cent of its stake to an investor who would inject about Shs261.8b (Ksh7.7b) into the business.
However, this (Shs261.8b investment) has not come to fruition and the business seems to be in more trouble than it was when its credit rating was first downgraded to BB- on December 15, 2016.
Subsequently, on June 27, Sheri Few announced Global Credit Ratings had withdrawn its rating scale assigned to Nakumatt Holdings because the supermarket chain had “not provided comprehensive and sufficient information [financial details] to facilitate an appropriate rating, and accordingly, we have terminated rating coverage on Nakumatt Holdings.”
Nakumatt had since 2007 been submitting its financial details to Global Credit Ratings annually and was assigned a credit rating that ultimately informs its lenders of its potential to pay back debts.
But the suspension of the rating, which was announced on June 27, places Nakumatt in a difficult position at a time when the business is searching for a deep-pocked investor (perhaps international) to buy a substantial stake (25 per cent) that would turn around its dwindling fortunes.
Aly-Khan Satchu, a Nairobi-based financial and equity markets analyst, believes Nakumatt is at a turning point.

“Nakumatt, as currently constituted has lost the faith of its bankers, its suppliers and employees. The only option available is for a [share] sale of the brand without liabilities,” he said in an emailed reply when asked what the supermarket giant can do to resuscitate its financial position.
The liabilities that Satchu talks about include the Shs159.8b debt, substantial sums in unpaid rent and taxes as well as the huge sums of money due to suppliers.
Such liabilities, he said, could have worked against the share sale [investor] that has been in the pipeline since 2010.

“Nakumatt has entered a difficult phase; it is highly unlikely that anyone [investor] will buy into the company, especially if nothing is done to sort [out] its current financial position,” Satchu said.
Nakumatt first showed willingness to sell a part of the wholly owned family business in 2007 when it needed a serious cash injection to facilitate its ambitious expansion.
But this has not come to fruition and the company is now looking at the government of Kenya that continues to send mixed signals towards a proposed bailout.

The government, through trade principal secretary Chris Kiptoo, is, according to Business Daily, mediating negotiations between Nakumatt and its creditors, to resolve the debt crisis that has pushed it to near collapse.
“The situation is not good. The government is not a Nakumatt shareholder, but my involvement is to see how we can bring all parties to an amicable solution. The retailer is too big to fail. Its collapse would have serious ramifications on the economy,” Kiptoo told Business Daily in July.
Nakumatt, which also has a presence in Tanzania and Rwanda, has since appointed audit firm KPMG to spearhead its restructuring.
As of December 2015, Nakumatt had nearly 65 stores: Kenya (46), Uganda (nine), Rwanda (three), Tanzania (five) and Burundi (one).
Plans to expand to South Sudan in 2013 had been put on hold due to a vicious civil war in the country.

In Uganda, Nakumatt seems to be clutching on a straw as negotiations with Uganda Revenue Authority to re-open three of its stores, including the main one, has entered a second week without much progress.
URA closed three of Nakumatt’s remaining stores in Uganda over unpaid tax arrears in the excess of Shs400m accumulated over five years.

Vincent Seruma, the URA assistant commissioner public and corporate affairs, told Sunday Monitor on Friday that URA would only reopen the stores after Nakumatt has provided a payment plan for the unpaid taxes.
“Yes we are negotiating [Nakumatt and URA] but we have asked them to pay a percentage of this money and provide a payment plan supported by postdated cheques. That is the condition we have given them for us to reopen the stores,” he said.
Repeated phone calls and email inquiries to Atul Shah, the Nakumatt Holdings chief executive officer went unanswered.

Asked about the progress of the negotiations, Alfred Ng’ang’a, who does public relations for Nakamatt Holdings asked Sunday Monitor to email him our inquiries.
However, by press time he had not sent through any reply to the emailed questions.

Earlier closures
The closure followed earlier ones that had resulted from the company’s failure to pay rent believed to be in the excess of Shs3b.
In June, Knight Frank closed three of Nakumatt stores in Bugolobi, Naalya, a far-flung suburb of Kampala and another in Entebbe, Wakiso District.

Marc du Toit, the head of retail at Knight Frank, told Daily Monitor then that Nakumatt had had some performance issues and “we felt they were not adding much value to the three shopping malls. We shall redevelop the spaces over the next five months to add value to our shoppers.”
Earlier in April, Nakumatt had voluntarily closed its store in Katwe, Kampala over non-performance.
Currently, a number of cases, many of which are filed by suppliers, have been opened at the Commercial Division of the High Court asking court to compel Nakumatt to pay more than Shs17.5b due to them.
Veterans state minster Bright Rwamirama in particular has sued Nakumatt seeking to recover Sh1.9b in rent arrears for rent space on his Mpororo Building in the western district of Mbarara. Nakumatt is a wholly Kenyan, privately held company, owned by the Atul Shah family.

At the close of June, Daily Nation reported that Nakumatt had received more than 10 offers from private equity firms to inject cash into the business but most of them had demanded that the Shah family cedes control of the business.
However, this remains a sticking issue with Daily Nation reporting that “the old man (Atul) cannot bear to lose control of the company,” which could have delayed the much needed cash injection.

[email protected]