Trinidad Cement Ltd on the brink

(Trinidad Guardian) As the strike at Trinidad Cement Ltd enters its fifth week, the Claxton Bay-based cement producer is being pushed closer and closer to the brink of financial collapse, which could throw thousands of workers on to the breadline, disrupt the country’s construction drive and an important part of its manufacturing sector and lead to tremors among the country’s financial institutions.

The 12 per cent salary increase being demanded by the Oilfields Workers’ Trade Union (OWTU) to settle the strike would add TT$21 million a year to TCL’s current wage bill of TT$170 million. Increasing the wage bill of the Trinidad operations at this point would be a strange decision, some analysts argue, in the context of the fact that the group’s shareholders have received no dividends since 2007 and TCL’s bankers have received neither interest nor principal on the company’s TT$1.8 billion debt in over 15 months.

The proposed wage hike by the local union may lead to similar compensation demands at the company’s Barbados and Jamaica plants and may cause TCL’s bankers and bondholders—who literally are providing the company with life support nutrients—to pull the plug on the company, which began production in 1954.

The TCL group, which has subsidiaries in Trinidad, Barbados, Jamaica, Guyana and Anguilla, is insolvent in that it determined sometime in the third quarter of 2010 that it would have been unable to pay its debts as they became due. In a notice to shareholders dated January 18 last year, the group announced that it was stopping the servicing of its debt—both the principal sums due and the interest on the principal—because it did not have enough internal cash resources to pay both and carry on paying its workers and its other bills as well.

In its third-quarter financial report for 2011, which was issued last November 18, the group’s non-current liabilities—which include its short-term and long-term debts—was put at $2.28 billion. TCL was forced to declare a moratorium on its debt payments because it was in default of its loan agreements.

At the end of December 2010, TCL was required by its lenders to carry maximum short-term debt of US$45 million (TT$288 million) and to maintain a minimum current ratio of 1.2, which means that its current assets should have exceeded its current liabilities by at least 20 per cent. According to the group’s 2010 audited financial accounts, TCL’s short-term debt (bankers’ acceptances and overdrafts) amounted toTT $431 million, some US$67 million, or nearly 50 per cent higher than the debt agreements.

The company’s over-dependence on short-term debt has two direct consequences for its future survival. Firstly, according to the nine-month report for 2011: “The absence of credit lines and the ability to establish letters of credit hindered continuous operations in Jamaica and Barbados in the nine months.”

 

And also when TCL finds a banker willing to lend it short-term money, the interest rate it is forced to accept is much higher than that paid by a financially sound company. TCL’s Jamaican subsidiary, Caribbean Cement Co, was required to pay interest rates as high as 21 per cent, according to the group’s 2010 financial report.

TCL was also unable to maintain the minimum current ratio of 1.2. At end of 2010, TCL’s current liabilities exceeded current assets by TT$1.36 billion and this had increased to $1.44 billion at the end of the third quarter of 2011. TCL’s current liabilities increased sharply in 2010 because, according to the International Accounting Standards Rule 1 “Presentation of financial statements,” a company that is in default of its loan payments must classify all loan balances as current liabilities “to reflect the fact that the loans are callable on demand as a result of the breach,” according to the 2010 annual report.

The fact that all of TCL’s TT$1.8 billion debt is “callable on demand,” is crucial for TCL’s ability to survive the downturn in the Caribbean economies as well as the five-week strike because it means that the company’s productive capacity in Trinidad, Barbados and Jamaica can be forced to come grinding to a halt  with no notice.

TCL has been trying to renegotiate its debt with its lenders for more than a year now. The group had initially said that that restructuring exercise would be completed by the end of September last year. As of yesterday, there was no indication of final agreement between TCL and its lenders.

Until the debt restructuring agreement is signed, the declaration of the moratorium on the TCL debt is an “informal” arrangement and not subject to any legal agreement. This means, according to the 2010 annual report, that TCL’s “lenders have retained their rights to demand immediate repayment of outstanding obligations in the amount of $1,704.7 million which the TCL Group is not in a position to immediately meet.

“Should lenders demand immediate repayment and initiate legal action to enforce their security there may be a risk to the going concern of the TCL Group.” In other words, any one of the financial institutions that have lent the cement producer money can demand immediate and full repayment of their debt. If TCL fails to pay the lender in full and immediately, that lender can approach a High Court judge issue for remedies up to and including having TCL declared bankrupt.

It is noteworthy that TCL has maintained in all of its public announcements on the debt restructuring that the “majority” of its lenders have formed themselves into a creditor committee. In its January 2011 statement, the group said that the creditor committee comprised “large domestic and international institutional lenders representing 75 per cent  of the TCL Group’s total debt.”

Unless the size of the creditor committee has changed since that statement, it means that lenders representing 25 per cent of TCL’s debt—or about TT$325 million—are not part of the creditor committee and can take independent, legal action to shut down TCL—even if there is an agreement between the creditor committee and the company.

Apart from being unable to pay its debts as they become due, the TCL group is also haemorrhaging money on a daily basis. TCL declared an after-tax loss of TT$80 million for the 2010 financial year. The 2010 loss will be exceeded in 2011 as the shortfall for the first nine months of last year amounted to TT$132 million.

Also the group has agreed that it will add the TT$113 million in restructuring fees and other costs to its 2011 statement of earnings. Also worrying some independent analysts is TCL’s delay in concluding the restructuring agreement, which envisages that all of the group’s short and long term debt should be converted into an eight-year facility with quarterly principal payments recommencing in March next year and interest payments in December this year.

The 2010 annual report says the restructuring would have been final by the end of September 2011. In October 2011, the restructuring was described as moving into its “final approval and documentation stages.” In November 2011, TCL anticipated that the agreement would have been signed in January as “various approvals are being sought while the legal agreements to effect the re-profiling are being drafted.”

The fact the agreement was not signed before the February 27 onset of the strike means that TCL lenders would be quite unhappy if the management agreed to unsustainable wage increases for striking worker. And there are queries about the long-term sustainability of TCL even without the wage hike. Lenders question whether TCL’s existing executive management can deliver “the high value export markets” in Haiti, the French Caribbean, Venezuela and Brazil and the production increases that the company is pinning its hopes on for a recovery.

Either way, the cement producer is between the rock of its trade union and the hard place represented by its lenders and there are doubts about whether the company can survive the squeeze.

 

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