Friday, August 21, 2015 07.15 AM / Proshare News & Investigations
To each entity involved in an ecosystem lies the responsibility to the market, the economy and the Nigerian financial system to connect its reason for being with the overall good.
What started as a simple inquiry into the performance of export related entities on the bourse and the incidence of non-submission of results turned into a five-month investigation and information gathering, the conclusion of which led us into the realities of entrepreneurship , impact of government policies and the role of financial services institutions in Nigeria.
What immediately stood out as we embarked on this exercise was the undeniable trail of “institutional failures” that laid the foundation for the shut-down of an otherwise viable entity and the wrongful tagging of an otherwise quality management that can hold its own within the “Trade Finance” community as inept.
The questions, concerns and inquisition were many. So what went wrong? Who was culpable? How could a company that raised so much money, had an ultra-modern firm launched by the President, State Governor and Bank executives get to a stage of stagnation? What happens to investors now?
The more we searched for answers, the more we saw how a series of policy changes, administrative inertia and indifference frustrated a well-intentioned entrepreneurial endeavour, a situation not helped by the regulatory framework that allowed the transfer of a performing loan to AMCON where new financial rules ensured it had no access to working capital legitimately.
Yet, for a country with a compelling need to develop and grow an export-based economy as a matter of survival, the rules of the game today (often changed mid-way) ensures that more losers emerge than winners; ceteris paribus.
This Multi-Trex case therefore offers much more than a story about the collapse of a company – it is the ultimate poster sign of all that was wrong with our financial markets, regulatory environment (lack of nexus between fiscal and monetary policies driving economic goals) and harnessing of resources to build a non-oil economy for Nigeria.
More importantly, it is a missed opportunity for AMCON, which is not sustainable, and it is hoped that by highlighting the issue we as a market/nation can start the process of a resolution. It is never too late to show creativity, initiative and equity in problem solving.
That Multi-Trex Integrated Foods Plc (“Multi-Trex” or “the company”), the flagship of the Nigerian cocoa-processing sub-sector is today closed for business is unimaginable, with about 200 persons rendered unemployed and the modern processing plant and equipments exposed to vandalisation and disuse.
AMCON has moved in and sealed the company, obtaining a court order from the Federal High Court in Abeokuta whilst an earlier case instituted by the same Law Firm working for AMCON against the same company is still pending in a Federal High Court in Lagos. Facts show that the Lagos case is adjourned till October 8, 2015 while the Abeokuta one is adjourned till October 21, 2015; in a judicial system that considers the Federal High Court System as operating a single jurisdiction.
The market may not have been informed of these developments and of the potential implications for investors; though the NSE has consistently listed Multi-Trex in its X-compliance reports for non-submission of financial results – an early warning signal.
The firm’s downturn was precipitated by the decision of Skye Bank Plc to place the Multi-Trex expansion-driven long-term loan with AMCON at a time it was performing which in consonance, the bank justified was motivated by the “...need to free-up liquidity for the bank, especially on the long dated exposure”. See letter below.
Thus, Multi-Trex Plc, a company that started out in 1999 as a raw cocoa beans cross-border trader and later listed on the Nigerian Stock Exchange (NSE) became a debtor to AMCON in 2011 and had its fate sealed given the lack of access to finance for a working capital driven business by a combination of factors most especially from the CBN and Nigerian Customs. How did the company get to this state? We enumerate below.
A Peculiar Business Model
The domestic cocoa-processing sector is characterized by seasonality of material input, high capital intensity - Investment and working capital and low sales margin. Typically, the cost of setting up a Cocoa Processing Factory can be as much as forty times or even more than the cost of setting up a cassava plant. Normally, the working capital required by a cocoa factory can be up to thirty-five times the amount required for cassava business of similar capacity.
The state of the domestic cocoa sector in Nigeria neither compares with those obtainable in other domestic manufacturing sub-sectors nor is it consistent with cocoa processing environment in other nations around the world.
With the encouraging and promising government policies of the early 2000’s, Multi-Trex decided to forward integrate to cocoa processing from being a pure trader. The evidence of this move was apparent to the market which was bearing fruit in other sectors of the economy then embracing either forward or backward integration.
As stated above, the Cocoa grinding business, the world over, is typified by its capital-intensive and low-margin-high-volume nature. This key peculiarity of the business model also dictates that the business’ operating expenses tend to be approximately the same at all operating capacity levels which gives an impetus for higher production output whilst punishing you for low operating output or shut downs.
Customarily, cocoa sector players in Nigeria have had to rely on high-priced financing obtainable and aim at raising turnover to counter the effect of the low margin. Indeed, Nigeria’s first three cocoa processing plants set up many decades ago in Ikeja (Lagos State), Ede (Osun State) and Ile-Oluji (Ondo State) owed their early business successes largely to the cost advantage they enjoyed from their 30,000mt per annum capacity.
These business realities must have guided the board’s fundamental aims in seeking optimal production capacity and in financing growth efficiently for competitiveness.
The Production-Profit Matrix and Financing
By 2005, Multi-Trex, constrained by its limited resources, could only afford to acquire a small plant of 10,000mt/p.a. of input as its maiden production facility with an eye on future expansion / scaling up based on business outcomes which looked promising.
Over the period 2005 to 2008 when the company’s 10,000mt plant was operational, Multi-Trex lacked the attraction of volume to make the more profitable major international off-takers patronise the company. Expectedly, the company contended with higher unit cost of sales but was able to deliver an appreciable level of growth in terms of investments, profitability and jobs as seen in the table below.
Raising Equity Proves Difficult
By 2008, the opportunity came for the company to expand its operating facility to improve on its economies of scale, size and profitability. To finance the expansion, the company made spirited attempts to raise N6.2billion equity injection through a Private Placement Offer (PPO). In anticipation of a successful PPO outcome, the company sought and secured a 180-day bridging facility of N2billion from Skye Bank Plc to facilitate early commencement of the production of the composite plant.
This was at a time when the global financial crisis had broken out and the domestic capital market entered its early stages of collapse that had investors spooked.
The financial advisers to the offer, led by Skye Financial Services Limited (wholly owned subsidiary of Skye Bank Plc at that time) and the Lead Underwriter of the Issue, pushed through and opened the PPO which yielded less than N2 billion of the N6.2billion sought. Not surprisingly, the underwriters to the offer decided to honour only 50% of their obligation.
This outcome manifested in financing gaps that saw the company approaching the bank on at least two occasions to request for the rollover of the short term bridging loan.
By 2009, the company started experiencing low capacity utilisation and difficulty with the repayment of the principal loan and interest expense. This severe pressure on working capital led to a historic Loss Before Tax (- N347m) for that year.
With the performance of the 2009 financial year, it became clear to the management of the company it would seem that the mismatch of the 180-day short-term loan used in funding the long-term project was not sustainable. In order to arrest the rapid rate at which loan taken was being repaid and in view of the objective to make-up the shortfall in the funding project, the company had to seek the conversion of the bridging loan to a term loan and further obtain additional borrowing from the bank to finance the consequential shortfall.
Borrowing as a Financing Option – Bank comes to the aid of the company
On June 1, 2009, Skye Bank Plc enhanced the bridging facility by N1billion and raised the tenor for the cumulative amount of N3billion loan to seven (7)years. In addition, the bank, on February 1, 2010, on-lend to the company a term loan of $9m (N1.35billion) and a $6m (N900m) working capital, both from Afrexim bank. Although the aggregated funds fell short of the company’s requirement for the project, which was initially budgeted at N6.2billion, they aided the project and the company’s business to the extent that the company was able to return to profit in the 2010 financial year.
Towards the end of the expansion project however, there were indications that the bank was no longer enthusiastic about the business’ long-term structure with obvious implications for the non-granting of funds needed to see the project to completion. The plant was therefore “prematurely” commissioned in December 2009.
In 2010, the company applied through Skye Bank Plc for the CBN Commercial Agricultural Credit Scheme (CACS) facility to provide cost efficient working capital to run the newly completed plant.
It was the CACS fund that was eventually obtained and made available to the company that enabled the company to demonstrate to the bank that all that the company required after the forced project completion was working capital as the facility made it turn a loss position of about N350million in November 2010 to a N159million profit by year end i.e. April 30, 2011. The table below shows some statistics on the level of the company’s investment, profitability and jobs created in the period 2009 to 2011:
Bank consolidates loan and transfers same to AMCON
According to sources close to the transaction, by October 2010, the bank decided to consolidate balances of all of the company’s long term loans with Multi-Trex totally N6.4 billion and discreetly commenced negotiations with AMCON not long after. The bank has a different take on this however, indicating it responded to changes in regulatory compliance demands and practical realities.
Be that as it may, by June 2011, the bank broke the news of its conclusion of the sale of the significant portion of the company’s loans, now amounting to N8.52billion to AMCON.
To fully appreciate what happened here, it is important to understand that the conditions under which a bank can and should transfer a loan granted to a customer to an institution like AMCON would have to include one or more of the following situations (or so the process leads one to believe):
1. Borrower found to be involved in any financial misconduct, fraud and/or mismanagement of borrowed funds.
2. The market value of goods/assets pledged as collateral suffers a significant loss or diminution in value
3. Serial repayment defaults by the borrower due to wilful act or ability to repay not foreseeable
4. Lack or loss of market for the borrower’s products and/or borrower’s business considered by the bank to be unviable.
The company represents that in its relationship with the bank and indeed with all of its stakeholders, the company and its management were above board in their dealings; ensuring that all funds obtained for the project were expended prudently on the project, mostly through the bank. It is in observance of this principle of transparency that the company chose to source the composite equipment for the new plant from two reputable European equipment manufacturers (OEM) that have strong corporate governance values, both having been in business for well over 100 years each.
A cursory review of correspondences between the firm and the bank did not reveal any instance where the bank confronted the company or its management team with issues about the funds management, its going-concern status or valuation of its assets used as collaterals.
Yet, the rapid growth of the debt profile owing to delays in project completion meant that concerns would have existed in the bank. The evidence of these concerns was not sighted however nor does it make the process any beneficial to the company.
Multi-Trex thereafter had to engage and make representations to AMCON wherein multiple proposals were exchanged with the aim of resolving the issue because at this stage AMCON having bought the debts effectively made the company a designated AMCON-Debtor; an appellation that ensured it was barred from access to funds from any financial institution; thus compounding their problem.
AMCON Reviews Concerns of Multi-Trex
The “Special Accounts” unit of AMCON was mandated to review the build-up to the loans, its performance, how it ended up with AMCON and what must happen next to ensure the repayment of loans in such a way that the business value to the economy was kept intact. This was a commendable move by AMCON’s management we believe.
The review revealed that Multi-Trex had cases of delayed repayments of its loans during the construction phase of its new plant project but as at the date the bank informed the company of the sale of the company’s loan to AMCON, the company was up-to-date with its repayment schedule. The company represented to AMCON that the only reason given to them by the bank for taking them to AMCON was “…to free-up liquidity for the bank, especially on the long dated exposure …”.
Indeed, it was discovered that the company had repaid funds over time accumulating to N1.795billion to the bank which was warehoused in a separate account while negotiations to transfer the debt to AMCON was on-going.
This sum was later recovered from the bank by AMCON and passed on to Multi-Trex to jump-start its already depleted working capital while the Corporation sought ways of restructuring the loans bought from the bank. This limited fund was however disbursed in a piece-meal fashion i.e. in seventeen (17) tranches over a ten-month period thereby constraining efficient utilisation.
It is instructive that the cash given were funds of the company returned back and not a fresh injection of capital, even as no moratorium was agreed or put in place during the period of negotiation where it was apparent that for a working-capital sensitive business; an immediate funding /repayment mix needed to have been instituted.
Post Loan-Sale to AMCON and the CBN Coup de Grâce
By August 2012, a proposal was made to AMCON (who continued to express conviction in Multi-Trex’s business fundamentals and its business prospects) to convert the N8.5billion bought from the bank as follows:
· N1.5billion to ordinary shares;
N4.5billionto a 5-year Convertible preference shares – Not Redeemable until August 2017; and
· N2.5billion to a 9-year term loan which tenor ends in August 2021.
All said, the details of the terms in the Restructuring Offer Letter issued by AMCON duly signed by the company would suggests that only the N2.5billion 9-year Term Loan, albeit part thereof, may be due for settlement and may, justifiably, be demanded for settlement.
AMCON agreed to look at an optimum restructuring solution but declined to consider the all-important business working capital for the newly completed plant.
AMCON reasoned it would rather offer support for the efforts of the company to source the much needed working capital from alternative sources.
The company must have held strongly to the optimism from this post-loan talks to seek a $25m working capital facility from Standard Chartered Bank (SCB) who had developed a sighted “term sheet” preparatory to an AMCON validation/resolution.
At the end of the restructuring exercise but close to the conclusion of the SCB facility, the Central Bank of Nigeria (CBN) issued a circular that posits to protect the financial sector from being abused by “serial bad debtors” but which indiscriminately prohibited all Deposit Money Banks (DMBs) from extending any new facility to AMCON debtors with exposures of N5b and above.
This was the kennel that broke the camels’ back literarily and shut the door to a working capital facility for the company.
The efforts of the company and Standard Chartered Bank to get the Central Bank of Nigeria (CBN) to grant a waiver for the loan proved futile.
When Trouble Comes, It rains ...as Customs ties down N3.5bn
The period 2012 to 2014 and indeed to date has understandably been nightmarish for the company, its investors and stakeholders. With orders pending from such notable firms include Nestle Nigeria Plc (who still has un-serviced orders from the company), the experience was frustrating and soul-wrenching for the staff and management who battled for daily survival.
As seen in the table below a steady deterioration of assets, investments, profitability and human resources has set in.
The company has been unable to avoid making huge financial losses, mainly on account of the subsisting CBN prohibition that shut it out of the country’s money market and partly due to the suspension of the use by exporters of Negotiable Duty Credit Certificate (NDCCs) by the Nigerian Customs Service (NCS), having been operating at sub-optimal capacity.
The Nigerian Customs’ suspension of the use of NDCC’s led to the tying down of over N3.5billionof the company’s working capital in NDCCs (similar to Treasury bills and Sovereign Debt Notes (SDN) issued to eligible fuel importers).
The Logjam and Closure of Firm by AMCON
By August 22, 2013 the Nigerian Customs Service had suspended the use of NDCC by exporters as highlighted above. This scheme, designed to assist exporters to compete in the international market, defray extraordinary operating costs incurred, which, are caused by infrastructural deficiencies in the domestic market environment; was inexplicably shut on the company without regard to its realities or its value to the economy.
Between March and October 2013 and in appreciation of the logjam created by the CBN’s directive, the Resolution and Restructuring Company of Nigeria (RRCL) - a wholly owned subsidiary of AMCON that is assigned the responsibility of managing restructured loans on behalf of AMCON - expressed readiness to reconsider granting the needed working capital to the company. Over many months, the company engaged and supplied several documents and data to RRCL to that effect. At a stage, RRCL indicated that they were going ahead with the process of appraising a N2billion working capital for the company instead of the N4billion the company applied for (RE: RRCL’S letter of September 30, 2013 and Multi-Trex reply of October 07, 2013). RRCL’s formal response/position on the matter was never sighted.
By October 2013, the company it was learnt engaged Standard Chartered Securities (“SCS”) as its financial adviser for the purpose of raising funds to repay AMCON and free the company from the hangover of CBN’s credit prohibition. In the course of its assignment, SCS was forced by enquiries from prospective investors to initiate discussions with AMCON with a view to establishing the minimum settlement amount acceptable to AMCON and enable the prospective investors to decide whether or not they would be willing to consider the investment opportunity any further.
This went on till June 2014, where on the one hand, SCS secured AMCON’s approval for the company to pay N6billion (N5billion of which was required to be paid within 30 days of acceptance of the Offer) in full and final settlement of the company’s obligation to AMCON. On the other hand, SCS was unable to deliver on this tight requirement on account of the uncertainties surrounding the government policies on cocoa and the restrictions on efforts to raise the desired capital.
On account of the non-availability of funds, Multi-Trex accepted AMCON’s June 24, 2014 letter of N6billion conditionally, requesting for an extension of time to meet the deadline for the first and main instalment. The company had little or no option and this dragged on as it could not source the funds without a CBN waiver.
In an effort to demonstrate good faith, Multi-Trex delivered its stock of NDCCs having face value of N874b to RRCL towards the settlement of part of the repayment due on the term loan. Owing to the NCS’s suspension, the instrument has not been discounted till date, despite the spirited efforts both AMCON and Multi-Trex made on the matter.
In order to boost the company’s chances of raising the needed capital the company engage more financial advisers at a cost it could hardly afford.
By September 22, 2014, Skye Bank Plc, like AMCON equally agreed for the company to pay N2.25b as full and final settlement sums for the remainder of the company’s debt in its books that was not sold to AMCON in 2011. On account of lack of funds, the company neither accepted the bank’s offer nor responded to the offer formally based on the records reviewed. This remains an outstanding issue.
By October 10, 2014, the outcry on the impact of the CBN circular on designated AMCON Debtors had reached a crescendo and the CBN came up with another circular, which pretentiously allowed DMBs to resume lending to the outcast AMCON-Obligors on very steep conditionality that are easily unattractive to many banks that may otherwise be interested.
This offered little respite to the company’s realities and by November 20, 2014, the company forwarded a new repayment program to AMCOM being the outcome of the meeting between the delegates of the Board of Multi-Trex and the top management of AMCON on November 4, 2014.
By this stage, parties in this transaction, based on our investigations had become weary for a myriad of reasons and the ominous signs were evident in deadlocked meetings and engagements.
The letter from Multi-Trex obviously offered little respite to an increasingly irritated AMCON who on December 29, 2014 sent a demand letter from a firm of Solicitors, Messrs Boundless Solicitors informing them of the decision to take over the assets of the company if they are unable to pay. By January 13, 2015, Multi-Trex instructed Messrs Dele Adesina & Co to forward a “holding” response to AMCON.
As at today when this report is being filed, armed officers are still enforcing a lock-down on the company; who has had a mareva placed on all its accounts and the company effectively taken over by AMCON or/and its agents.
What happens next is better left to imagination and if it continues unresolved, the evidence before us suggest that the nation’s attempt at a private sector led involvement to becoming a value-added resource producer will die in infancy.
AMCON and policy makers have a chance to re-write the story. The nation needs a new ending.
For further enquiries regarding this story contact email@example.com
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