- A consortium led by Safaricom paid $ 850 million (Sh98.3 billion) to enter the new market, where the telecommunications company is heavily dependent on short-term loans to meet its share of capital obligations.
- Converting the loan to a long-term facility will generate significant interest income for the banks that would otherwise have to look for another borrower to lend to.
- The price of the loan has not been disclosed, but dollar facilities typically attract mid-digit interest rates.
Standard Chartered Bank Kenya #ticker: SCBK was one of the major banks that lent Safaricom #ticker: SCOM a total of $ 400 million (Sh46.3 billion) last year, helping the telecom operator pay for its Ethiopian license.
A consortium led by Safaricom paid $ 850 million (Sh98.3 billion) to enter the new market, where the telecommunications company is heavily dependent on short-term loans to meet its share of capital obligations.
“We managed a landmark financing for a telecommunications client in the East African region. This was the largest loan syndication worth $ 400 million,” StanChart said in its latest annual report.
“The $ 400 million facility consisted of a short-term stand-by letter and a 12-month loan, which enabled the consortium to submit and finance the winning bid for the first full-service mobile telecommunications license to a private operator in Ethiopia.”
StanChart did not disclose the other banks it worked with to fund Safaricom. The other lenders could include its London-based parent company Standard Chartered Plc and local major banks.
The telecommunications company had previously separately disclosed the short-term loans without identifying the banks, adding that it was negotiating to convert them into long-term loans to free up its cash flows.
“To support the payment of license fees for the telecommunications license awarded to the Safaricom-led consortium by the Government of Ethiopia, we undertook a $ 400 million one-year bridge facility to fund this venture,” Safaricom said when announcing its half-year results. September.
“We are currently seeking to complete the bridge facility through a long-term arrangement to manage our working capital needs in the short term and minimize the currency risk for the dollar loan.”
Converting the loan to a long-term facility will generate significant interest income for the banks that would otherwise have to look for another borrower to lend to.
The price of the loan has not been disclosed, but dollar facilities typically attract mid-digit interest rates.
For Safaricom, the extension of the maturity period has saved it from a major repayment headache at a time when the weakening of the shilling has inflated the dollar-denominated debt.
The telecommunications company earns most of its revenue in Kenyan shillings, and this is the largest loan it has ever taken out in hard currency, increasing its overall debt burden.
The shilling has fallen 6.9 percent in the past 12 months to trade at 115.7 units against the dollar. Safaricom’s total bank loans rose to a record high of Sh76.9 billion in the half-year ended September, underscoring the impact of the $ 400 million syndicated loan.
The company’s debt increased 5.2 times from Sh14.7 billion a year earlier, making it one of the largest corporate borrowers along with others such as KenGen #ticker: KEGN, Kenya Airways #ticker: KQ, and Kenya Power #ticker : KPLC.
Safaricom noted that it had cash and cash equivalents of Sh26.4 billion during the review period, which placed its net debt at Sh50.5 billion.
In its early life as a listed company, the telecommunications company used to finance its growth through debt, but it got used to medium- to long-term debt as its cash generation exceeded the need for reinvestment.
However, the Ethiopian venture requires large investments, which will see Safaricom further increase its loans given its role as major shareholder in the new business with a 55.7 percent stake.
Out of the borrowing of 76.9 billion Sh76.9 billion, Sh62.2 billion is in the form of short-term debt.
Safaricom said it is investing an initial $ 600 million (Sh69.4 billion) in Ethiopia as part of its contribution to the consortium’s total investment commitment of $ 8 billion (Sh926 billion) over 10 years, excluding the cost of the license.
It is still unknown whether the telecommunications company will change its dividend policy due to the huge capital requirements of the Ethiopian venture.
Safaricom has distributed at least 80 percent of its net income to shareholders, and the remaining 20 percent is left for reinvestment in infrastructure and retained earnings, which now stands at 133.7 billion.
The telecommunications company was able to use the retained earnings to partially finance its Ethiopian liabilities.
Safaricom says it will fund Ethiopian investment through its own funds and loans from local banks and development finance institutions.
“We expect capital expenditures of between $ 1.5 billion (Sh173 billion) and $ 2 billion (Sh231 billion) over the next five years to meet license coverage obligations,” Safaricom CEO Peter Ndegwa said earlier about the consortium’s initial Ethiopian investment .
The telecommunications company’s need to borrow more funds in the long term is set to benefit local banks.
The large borrowers allow the banks to provide a few large loans in local currency as well as dollars, thus diversifying their loan portfolios.
However, most of the loans are expected to come from government wealth funds and development finance institutions, which have much deeper pockets and can lend over periods lasting more than a decade.
The consortium had applied for a $ 500 million (Sh57.8 billion) loan from the US International Development Finance Corporation (DFC). However, the US State Department has delayed the disbursement of funds, citing uncertainty over the ongoing unrest in Ethiopia.