All indications are that Trinidad Cement Ltd (TCL) will soon head back to its lenders' tables to re-negotiate its debt of some $2.05 billion.
The following is an extract from the 2012 CEO's report and management discussion: "While the Group ended 2012 in full compliance with the agreement, the board and management have continued to express concerns to the lenders about several aspects of the debt restructuring that will be burdensome to the Group going forward.
These mainly concern the extent of interest costs, excessive legal fees, on-going costs of financial and technical restructuring, costly overseas directors, and the requirement for an additional expensive foreign executive."
These complaints would not be published if there was no intention to act on them.
The phrase "continued to express concerns..." suggests that the May 10, 2012, agreement may have been inked under duress. If so, then one wonders if TCL did not have a "top-notch" team to help secure its interest during these negotiations. Certainly, it seems that the lenders were able to secure their interests far better than TCL was able to do for its shareholders.
When we look at the weighted average interest rates for 2011 and 2012, we get some idea as to TCL's weaker (and possibly weakening) position. The weighted average effective interest rate for borrowings increased from 9.65 per cent in 2011 to 9.9 per cent in 2012.
The concept of renegotiation often suggests that the borrower wants lower interest on his debt. In an environment where, even so-called "troubled countries", such as Jamaica, can negotiate lower interest rates, how is it that TCL cannot do the same? Is it that they do not have what bankers refer to as "acceptable assets/security"? Or, can we infer from the higher rates that the lenders do not have sufficient confidence in the skills of TCL's current directorate and management?
Payback mechanism
Let us look at another rationale. Could it be that, when TCL declared a moratorium on its debt service payment on January 14, 2011, the lenders were "highly annoyed" by this unilateral decision. Consequently, as part of the "payback mechanism" TCL had to be "punished" for its "reckless indiscipline". As we know, lenders punish borrowers using high interest rates, exorbitant fees, special conditions and other ruses to keep the wayward borrower "in line".
Many well-run local companies welcome foreign assistance from time to time. What do we make of the company's resistance to the hiring of a foreign executive to help in the turnaround efforts?
Does TCL's opposition go beyond the obvious cost considerations? Surely, in an era when technology is changing quickly, a helping hand from a highly experienced individual should be welcomed? If TCL's technicians are "the best in the world", how come they have been unable to manage the company, especially over the last five years, to the satisfaction of its owners, lenders and employees?
One special condition that is of interest to shareholders is the limit being placed on the payment of dividends. Under the current loan agreement, dividends cannot exceed US$3 million (about TT$19.2 million). When we relate this figure to the 249,765,136 shares outstanding, then we can see that the maximum dividend potential is less than 8 cents per share. The agreement further states that a dividend can only be paid when the ratio of the debt to the EBITDA is less than or equal to 3.
TCL's inability to grow
Another condition is that TCL's capital expenditure is limited to US$15 million; this restriction stymies the company's ability to grow. Finally, if the cash balance as at the end of a quarter is greater than US$15 million, then the excess is payable to lenders as an additional debt service payment. Are we correct in assuming that this excess would be applied to reduce the principal balance?
Another variable for both lenders and shareholders is found in note 2(ii) under the heading "going concern". The second sentence in the third paragraph reads: "Should the Group achieve less than 85 per cent of its 2013 forecasted cash flows, there would be a cash shortfall, which may compromise debt service in 2013." Payments of both principal and interest in 2013 are forecasted at $293 million. The 85 per cent hurdle does not give TCL much "leg room" to manoeuvre.
Jamaica
Let us now turn briefly to its major Jamaican subsidiary, Caribbean Cement Company Ltd, which is 74.08 per cent owned by TCL.
Sales at CCCL rose to J$9.08 billion in 2012 from the 2011 base of J$8.03 billion; this represents an improvement of 13.1 per cent. EBITDA also improved from a negative J$1.76 billion in 2011 to a (still) negative J$750 million last year.
Despite these improvements, impairment losses, finance costs and taxes eroded these gains. Consequently, the 2012 loss was J$3.35 billion, which represented a 28 per cent increase over the loss of J$2.61 billion recorded for 2011.
CCCL had, as at December 2012, non-current assets of J$4.55 billion and current assets of J$3.94 billion. The company also had current liabilities of J$3.75 billion and non-current liabilities of J$7.68 billion. This put the company in the position of having a net liability position of J$2.94 billion. In essence, without the support that it received from its parent company, TCL, CCCL would be unable to continue operating. Some would say that it was essentially bankrupt.
In 2012, the amount due to its parent company increased from J$4.77 billion in 2011 to J$6.88 billion as at the end of 2012. Furthermore, long-term debt increased from less than J$4 million as at year-end 2011 to almost J$800 million as at December 2012.
In an attempt to salvage the situation somewhat, there was a proposal tabled at its AGM on June 26, 2013 for CCCL to issue 100 million new preference shares to TCL in exchange for debt obligations due to TCL by CCCL. When implemented, this would reduce CCCL's debt to TCL by about half.
These preference shares would not be obliged to pay a dividend. However, if CCCL does declare an ordinary dividend, then the same rate would be applicable to this preference share. In January 2010, a similar conversion was done for debts to TCL of US$15 million.
Carib Cement's missteps
The following is an extract from an article dated May 10, 2013, from the Jamaican based Investor Choice, which puts some of Caribbean Cement's missteps over the past decade or so, into perspective.
"Messed up: Caribbean Cement has messed up so many times in recent years that it will take a massive change in its financial fortunes to restore investors' confidence. The first error is that the company totally mistimed the plant expansion by not anticipating the increased in demand in the mid-2000s.
As a result, they missed most of the increased demand and the expanded plant only caught the tail end of it.
Secondly, the company missed a glorious opportunity in 2004, when the stock price was sky high, to raise added capital in the local market to help fund the expansion.
Finally, there is no evidence that they forged the right political connections or presented a viable plan to ensure continuity in cement supply, thus opening the market to unneeded imports which severely hurt them and from which they continue to reel."
At tomorrow's, TCL AGM, five of its directors are retiring by rotation. These individuals are Rollin Bertrand, Bevon Francis, Carlos Hee Houng, Brian Young and Jean-Michel Allard. As reported in the Business Guardian of June 27, 2013, a group of shareholders, who control almost six per cent of TCL's shares, have got together to propose fresh nominees to replace the outgoing TCL directors. The names proposed are Garth Chatoor of PowerGen; contractor, Emile Elias; ex-banker, Gregory Thompson; Imtiaz Rahaman of Ramco Industries, and management consultant, Kelvin Mootoo.
So far, TCL has resisted this initiative. One of the reasons cited was that other institutional investors, such as the NIB, UTC and Cemex, have only one director on the board. I am sure TCL will offer other "reasons" to defy this progressive shareholder initiative.
Are we seeing the occasional attempts at good corporate governance being thwarted by a narrow-minded clique, which seems to be attempting to preserve its own power-base?
I think most readers would agree that we need strong and viable companies, which are run in a transparent, efficient and progressive manner to the benefit of shareholders, employees, lenders and other stakeholders.
Whether or not the election of the new directors is considered at the upcoming (or rescheduled) AGM agenda, the efforts by minority shareholders to put TCL on a stronger footing should continue, perhaps in the courts...