Mumias Sugar Is Dead, What Lessons Can We Learn?

Mumias Sugar Company was placed under the care of a receiver-manager followed closely by the suspension of trading of its shares at the NSE.

The receiver-manager comes in after a long period of severe financial, operational and industry difficulties.

With this move, the Mumias Sugar Company stock liked by local individuals due to its perceived low price will lock in c.130k of retail shareholders (64.7 percent of the issued shares) who are unlikely to realize any value of the shares they hold any time soon, if ever.

With the suspension from trading, the investors cannot realize capital gains from offloading the shares.

Additionally, in the event of liquidation of the company, the assets of the business are barely enough to cover (as a first priority) creditor’s claims in the business.

In the latest financial report, the business had staggering negative equity of 15.9 billion shillings with the liabilities of the business (31.3 billion shillings) far outweighing the total assets of the business (15.4 billion shillings).

Were the business to be liquidated, shareholders would get nothing and creditors would have to take a deep haircut on their outstanding amounts.

MSC is not a unique case of a business crumbling under the weight of a highly levered balance sheet. In 2018, ARM Cement fell to the creditor’s control (c/o UBA Bank) after experiencing deep financial difficulties.

Another listed, Deacons East Africa went into a directors-sanctioned administration (barely 2 years after listing) after experiencing the business and financial challenges.

Receivership, a rare term in the past inequities market, is becoming a common phenomenon, thanks to the 2018-enacted Insolvency Act.

“Increasingly, we are seeing commercial banks and other lenders seeking to protect their financial interests through this Act,” said analysts from Genghis Capital.

Occasioned by the rising number of financially challenged entities (which are eroding the critically sort investor confidence at the NSE), the Capital Markets Authority (CMA) recently came up with proposals for the establishment of a Recovery Board.

The Recovery Board is meant to list companies that are “technically insolvent, non-compliant with any listing obligations or whose operations are conducted in a manner that is prejudicial to the interests of investors or market integrity”.
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While there are no uniform criteria we can pinpoint of listed businesses that could be casualties of the Insolvency Act, the overarching theme is “high debt load and incapability to meet the debt obligations (default) and/or a broken business model”.

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Mumias Sugar Company Shares Suspended From Trading At NSE