Businesses owned by the wealthy Philip Ndegwa family took the biggest blow from the collapse of fashion retail chain Deacons East Africa, a report by the company’s administrators has revealed.
The Ndegwas risk losing a total of Sh424 million that Deacons owed their companies — NIC Bank (Sh387.5 million), The Junction Mall (Sh35.4 million), ICEA Lion General Insurance Company (Sh887,675) and real estate management firm Knight Frank (Sh219,625).
The Nairobi Securities Exchange-listed company, which counts former president Mwai Kibaki’s family among its top shareholders, is also facing claims from a group of high-profile businesses that stand to lose the most from the bankruptcy.
They include firms owned by businessmen Chris Kirubi and Peter Muthoka, and the Nicholas Biwott family.
The PKF Consulting report shows Deacons’ shareholders and more than 120 creditors would be left Sh1.9 billion in the negative if the business were to be liquidated.
The fashion chain’s asset-light business model means its balance sheet has low-value property such as furniture and stock, which are inadequate to cover even secured creditors.
“This statement of affairs indicates that in the event of a liquidation (forced sale basis) the creditors are likely to lose 95 percent of their debt, with unsecured creditors likely to lose 100 percent of their debt,” PKF says in the report to Deacons’ creditors.
Mr Muthoka’s logistics firm Andy Forwarders Services is owed Sh21.5 million while Two Rivers Lifestyle Centre (operator of the Two Rivers Mall), an associate of Mr Kirubi’s Centum Investments, is claiming Sh6.5 million. Yaya Towers Limited, owned by the Biwotts, is owed Sh16.5 million.
The Ndegwas’ exposure to Deacons deepened after NIC Bank moved to help the company to save its Mr Price franchise, whose owners grew increasingly agitated by the NSE-listed firm’s default.
“When Mr Price forcefully recalled their letter of credit (LC) facility, NIC Bank supported the business by financing the LC facility backed by a term-loan booked as a long-term debt facility in Deacons,” the administrators say in the report.
“As Mr Price was contributing 50 percent of sales of the business, management felt they needed to save the brand and therefore used operating cash from other branches and debt financing facilities to pay for their underperforming products.”
Deacons, however, lost the Mr Price business in May last year when it was bought out by the franchise owner, South Africa’s Mr Price Group, for Sh133 million.
By the time Deacons went into administration in November last year, its obligations to NIC Bank comprised overdraft (Sh122 million), commercial loan (Sh252.8 million), operating lease (Sh10.4 million) and insurance premium finance (Sh2.1 million).
When the retailer’s board wrote to the bank on November 16, 2018 seeking its approval of the proposed PKF administration, the lender gave its consent on the same day.
UBA Bank Kenya Limited, which is claiming Sh152.8 million from the business, agreed to the proposal five days later but with certain unspecified conditions.
Debt from the two banks is secured by floating charges (a claim on all assets).
On paper, Deacons has some Sh606 million worth of assets to cover their claims but PKF says their forced sale would fetch only Sh63 million.