A shortage of cash has forced Caribbean Cement Company (CCC) to ask its parent company, Trinidad Cement Limited (TCL) to swap US$15 million of the debt for preference shares in the company.

Last week, the cement manufacturer notified shareholders of the pending transaction for which approval will be sought at an extraordinary general meeting (EGM) to be held on January 5, 2010.

“The company is unlikely to be able to repay the loans made by TCL in the short to medium term,” said the company in an explanatory note to shareholders. “Furthermore, because they are denominated in US$, the loans have the effect of creating a disproportionate foreign exchange risk for the company – that is to say, if the Jamaican dollar were to devalue the company’s cost of servicing the loan from its Jamaican dollar revenue source would increase and the loan amount would translate into an even greater liability on the company’s balance sheet.”

The deal entails the retirement of some US$15 million of debt between the company and TCL in consideration of the issue by CCC of a new class of preference shares to TCL.

The shares are expected to be treated as equity securities as they do not carry rights to a fixed dividend with TCL only being “entitled to receive a dividend as and when one is declared in respect of the ordinary stock units of CCC, of at least the same amount”.

An agreement will essentially reached at the meeting to be held early next year as TCL owns 74 per cent of hte ordinary shares in issue.

The debt arose from financing made over the years on Carib Cement’s ongoing expansion and modernisation project, which began in 2005.

Between 2005 and 2008 CCC committed US$80.6 million towards the project and, according to general manager Anthony Haynes’ note to shareholders in the 2008 annual report, the cement manufacturer had invested $572 million in the new plant and “funding from TCL amounted to $4.88 billion”.

“These borrowings appear on the company’s balance sheet as both short-term and long-term loans,” said the explanatory note.

At the end of September 2009, CCC had $5.2 billion in total liabilities compared to $5.6 billion a year before while the company’s working capital, which was in deficit by $862 million at September 30, 2008, stood at a positive $95 million at the end of September this year.

Even then, the cement manufacturer’s cash position remained in the red – cash and cash equivalents stood at negative $83 million at end-September as CCC was in overdraft by $111 million.

Fundamentally, Carib Cement has been unable to generate enough net cash from its operating activity to cover the investment cost, and more importantly, since 2009, the finance cost associated with the expansion.

Interest expense of $123 million and loss on currency exchange of $251 million resulted in CCC suffering pre-tax loss of $125 million for the nine months to September 30, 2009. Most of that loss was experienced in the last three months of the review period, when the company was even able to make an operating profit – it made an operating loss of $372 million and pre-tax loss of $431 million.

The board of directors told shareholders in the explanatory note that not approving the proposal would “seriously jeopardise the future profitability of the company”.

Added the explanatory note: “A conversion to ordinary shares would have had the effect of watering down your existing holding and accordingly, your board worked out an arrangement under which TCL will accept a special type of US$-denominated redeemable preference shares which we are advised by our auditors will qualify for equity accounting treatment. The conversion of the Company’s indebtedness to TCL into equity preference shares will act to stabilise and improve the Company’s balance sheet.”

The EGM scheduled for January 5 next year is to be held at Knustford Court Hotel in New Kingston.