Questions are being raised over Umeme’s intention to clear its shareholder loan using proceeds from its $69 million Initial Public Offer (IPO). Industry sources say the company will likely do a rights issue almost immediately after listing.

On top of repaying the loan from its shareholders, the power utility firm is also servicing other loans. These factors significantly undermine Umeme’s capacity to finance critical projects that would enable it to achieve its performance targets and keep investor confidence high.

(Read: Umeme gives first priority in IPO to $27m shareholder loan)
“Umeme is likely to pursue a rights issue in the near future to cater for pending long-term projects that are necessary for maintaining efficiency and profitability.

Investment schedule

So far, it has convinced institutional investors that it is ahead of its investment schedule and this will ease worries about recouping money ploughed into the business,” argued Arnold Byarugaba, corporate sales manager at Stanbic Bank Uganda.

The IPO is the easiest way to raise cheap interest-free capital to finance the company’s future investment plans and build investor confidence about the power distribution firm’s business prospects.

According to some analysts, paying off the $27 million loan owed to its shareholder Actis, a British private equity firm, would clean up Umeme’s balance sheet and appease investors that are worried about its prolonged financial burdens.

However, in his notes contained in the IPO prospectus Umeme chairman Patrick Bitature argues that clearing the loan is a rational strategy as it reduces Umeme’s debt ratios and creates more room for future borrowing intended to fund expansion programmes.
But liquidating Actis at this point also diverts resources required for the execution of pending projects, such as rolling out prepaid metering, rehabilitation and expansion of the supply network.

Uganda’s electricity coverage is estimated at nine per cent of the total population compared with Kenya’s 30 per cent.
Local analysts are in favour of Umeme’s financing strategy, but are slightly worried about its ability to invest heavily going forward.

Others fear that the utility firm could exit Uganda before seeing out its concession, leaving the investors now buying into the company with a heavy financial burden.

“The shareholder loan has been carrying a high interest rate thus reducing available cash to invest in long-term assets. It would be better to raise cheap money to pay the loan off and free up money to invest in long-term assets.

However, given that Umeme has only 13 years left on its concession and they are not sure whether it will be extended, I’m sceptical about the firm investing heavily in long-term assets,” said Joel Semukaaya, corporate finance associate at Burbidge Capital Ltd.

Given that the Actis loan attracts 12 per cent interest per year, analysts argue that Umeme is better off paying this loan now.

“Paying off the shareholder loan is a smart move for any company willing to list. Investors are usually nervous about a balance sheet that contains shareholder loans because of prolonged financial burdens and that is why Umeme is eager to clear the debt immediately,” said Mr Byarugaba.

Sourcing for funds from commercial lenders easily guarantees the company large chunks of money required for big projects. However, it also poses financing risks related to fluctuations in interest rates and cashflow deficits that are sparked by a surge in repayment charges.

Debt problems

Volatility in global financial markets caused by debt problems in the Eurozone and the reluctance by commercial lenders to fund new ventures due to weak global economic recovery might undermine Umeme’s chances of raising sufficient debt capital for its expansion.

Umeme’s IPO appears to be having little impact on trading activity at the Uganda Securities Exchange (USE), contrary to market expectations.

The falling inflation rate, which dropped to 5.4 per cent last month compared with 11.9 per cent in September is partly responsible for increased disposable incomes among consumers. As a result, prices on various local counters have remained fairly stable since the IPO launch while turnover rose significantly mid last week.

Falling interest rates and higher default costs have forced banks to temper their lending appetite towards interested investors, unlike the Stanbic IPO that witnessed smooth loan approval.

On further scrutiny, could Umeme have budged to pressure from Actis to repay the loan? Is Actis so nervous about Umeme’s ability to repay the loan despite fairly remarkable earnings?

Having declared its intentions to exit East Africa a few years ago, Actis looks more willing to raise cash and cut back on current financial obligations. So far, the private equity firm has sold off its stake in Rwanda’s BCR to I&M Bank of Kenya, but failed to dispose of its majority shares in DFCU Ltd last year, following unsuccessful negotiations with Uganda’s National Social Security Fund.

Raising more equity capital for expansion, however, probably offers Umeme the cheapest source of long-term funds in an economy dominated by short term deposits held by commercial banks and microfinance institutions.

Though foreign institutions took up all the allocated forty six per cent shares prior to the IPO launch, local institutions appear more lukewarm towards taking up Umeme shares than retail investors. As a result, strong retail interest has already fed into stockbrokers’ books within two weeks of selling shares.

For instance, Dyer and Blair Uganda Limited recorded roughly Ush120 million ($46,261) in shares sold by close of Monday last week while some of its peers had grossed roughly Ush100 million ($38,551), mainly raised from retail investors that are serviced by more than ten selling agents.

But figures obtained from African Alliance Uganda, the lead sponsoring broker, showed that the IPO had raised Ush1 billion ($385,505) by Wednesday out of Ush35 billion ($13.5 million) targeted from retail investors.

“Most of the retail clients are relying on personal savings while others are waiting for October salaries to draw money for buying shares. So far, we have noticed only one client that has sold off Safaricom shares to raise money for Umeme’s IPO,” said Paul Bwiso, General Manager at Dyer and Blair Uganda Limited. Umeme’s Ush171 billion ($69 million) public offer comprises 622,378,000 shares valued at Ush275 ($0.11) each.

However, Umeme’s IPO appears to be having little impact on trading activity at the Uganda Securities Exchange (USE), contrary to market expectations.

Falling inflation that dropped to 5.4 per cent last month compared to 11.9 per cent in September is partly responsible for increased disposable incomes among consumers. As a result, prices on various local counters have remained fairly stable since the IPO launch while turnover rose significantly mid last week.

Falling interest rates and higher default costs have forced banks to temper their lending appetite towards interested investors, unlike the Stanbic IPO that witnessed smooth loan approval.