The Milling Company's Restructuring Request
Kijani Milling Ltd has held a KES 45 million term loan with your bank for three years, originally amortising over five years at 14% reducing balance. For the last two quarters the company has paid only interest, and the arrears on principal now stand at KES 6.2 million. The finance director presents a turnaround plan: a new maize supply contract with a regional supermarket chain worth KES 90 million annually, but the contract pays 60 days after delivery while the company must pay farmers cash on delivery. The company is asking for the arrears to be capitalised, the tenor extended to seven years, and a fresh KES 10 million working capital line. Current ratio is 0.94, the debt service coverage ratio on the restructured terms is projected at 1.15, and the directors have offered a personal guarantee but no additional collateral. The account is currently classified as substandard in your books.
1. As the relationship manager, assess whether this is a genuine rehabilitation case or a delay of loss recognition. What specific evidence would move your recommendation one way or the other?
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The core test is whether the business has a viable earnings engine independent of the new money, or whether the fresh KES 10 million is simply funding a cash gap that will reappear.
Signals pointing to delay of loss recognition:
- DSCR of 1.15 is thin; after a shock it falls below 1.0. A genuine turnaround plan should target headroom (1.3+).
- The working capital gap is structural, not temporary: 60-day receivables against cash-on-delivery payables means the new contract increases the funding need. Lending KES 10 million into a widening cash cycle is throwing good money after bad unless the gap is quantified.
- No new collateral; a personal guarantee from directors whose net worth has not been verified is weak comfort.
- Two quarters of interest-only payments already show the original projections were wrong.
Evidence that would support rehabilitation:
- A signed, enforceable supply contract with the supermarket (not a letter of intent), with penalties and volume commitments.
- A cash-flow forecast showing the peak working capital requirement of the new contract and how it is funded beyond the KES 10 million.
- Evidence of a receivables discounting or invoice-financing arrangement with the supermarket so the 60-day cycle does not sit on the bank.
- Verified director net worth supporting the guarantee.
- Cost cuts already implemented (not promised) that lift DSCR above 1.3.
Recommendation logic: Restructure only if the contract is enforceable, the working capital gap is fully funded, and DSCR clears 1.3 with a sensitised downside. Otherwise, recognise the loss, move to recovery, and preserve the bank's legal position.
2. Draft the conditions you would attach to any restructuring approval, and explain why each condition protects the bank.
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Conditions should convert promises into enforceable protections:
- Hardened security - additional collateral or a registered charge over the supermarket receivables (assignment of proceeds). Protects the bank by giving a claim on the very cash flow that justifies the restructuring.
- Direct payment instruction - the supermarket pays into an escrow/collection account controlled by the bank. Prevents diversion of the new contract's cash to other creditors.
- Financial covenants - minimum DSCR of 1.3, maximum gearing, and a minimum current ratio, tested quarterly with certificate delivery. Gives an early-warning trigger and a contractual default event.
- Milestone-based disbursement - release the KES 10 million in tranches tied to verified contract performance. Limits exposure if the turnaround stalls.
- Guarantee perfection - verify director net worth and register the guarantee properly. Converts a comfort into a recoverable claim.
- No dividend/distribution restriction and a ban on new borrowing without consent. Prevents leakage of cash to shareholders ahead of the bank.
- Reporting pack - monthly management accounts, aged debtors, and stock reports. Enables monitoring between covenant tests.
Each condition is a control point: it either secures the bank's claim, preserves cash within the business, or generates the information needed to act early.