Maxland PLC Financing Options: Critical Review and Recommendation

Maxland PLC is a public company that was incorporated in 2012 with a registered capital of 100 million shares of Ksh. 10 each. Since incorporation, the company has issued 40 million shares accumulating the paid-up share capital to Ksh. 500 million. Further, the Company has a long-term borrowing amounting to Ksh. 200 million. Since the company is not listed in any stock exchange, it has been raising its equity capital through private placement and loans from financial institutions. 

Early February 2022, the company received an offer to acquire a competitor at a cost of Ksh. 300 million. This deal will essentially increase the company’s market share to 65% - a deal that the company is eager to take advantage of. The company, however, does not have enough funds and will need to raise the required Ksh. 300 million from financial markets or institutions.

Five options are available:

Option I: Borrow a ten-year loan from its bankers that will be secured on all the company’s assets. This loan will attract an interest rate of 16% per annum and will require transaction fees amounting to 1.2% of the value of the loan.

Option II: Float a ten-year corporate bond that will have an annual coupon rate of 12%. This will require the company to publish a prospectus and conduct its credit rating. The floatation costs are estimated at 3.8% of the value of the bond. Comparable bonds have not been very successful in the recent past as the subscription rate has averaged 67%.
Option III: Conduct an Initial Public Offer (IPO). This will require the company to publish a prospectus, get an underwriter and have the company listed at the Nairobi Securities Exchange. Floatation costs are estimated at 4% of the nominal value of the shares issued. If successful, the company will be listed in the Alternative Investment Market Segment (AIMS). In the recent past, the equity market has been bearish and new stocks have had to be issued at a discount.

Option IV: Borrow a loan from First America Bank. The loan will be denominated in US Dollars, repayable in ten years at an annual interest rate of 5%. Upfront transaction costs amount to 1.2% of the value of the loan. The current average exchange rate (Ksh to the US Dollar) is 112.60. Further, the loan will need to be secured on all the company’s assets. Any default in payment of a loan installment attracts a 2% penalty on the installment due. 

Option V: Use mezzanine financing. This will require an agreement with Attract Capital – a company that structures such finances. Under the deal, Maxland PLC will get all the required funds within 120 days of conducting the due diligence. Under the deal, the funds will be available as a loan for six years, thereafter it will convert to equity in favour of Attract Capital. In the event of inability to get all the funds within 120 days of due diligence, bridge financing arrangement will be available. 

Required:

Using available market information for the first 8 months current financial year (July 2021 – January 2022) and the potential forecasts into the future, critically, evaluate the five proposals and advise the directors on the best option to pursue.

Your answer should be structured as follows:

Section I: Introduction – this should be about two pages highlighting the current financing structure of the company with an observation on its potential to finance the current project. Also include the considerations that a company should take in making a decision to finance a major project.

Section II: Analysis – this should be a critical review of the five financing alternatives stated above. Use appropriate market data (July 2021 – January 2022) and appropriate forecasts available from the Kenya yield curve, Central Bank of Kenya, Capital Markets Authority, and any other relevant data sources to argue your case. This section should have a maximum of five pages. 

Section III: Conclusions and Recommendation – This should be about a page describing your conclusions and recommendations that should explicitly flow from the analysis conducted in section II above. Assumptions made in your analysis should be stated in this section.