Bamburi Cement Ltd. (Bamburi Cement) is a Kenya based cement production company. Bamburi Cement, through its subsidiaries is primarily engaged in the manufacture and sale of cement and cement related products, which include the Portland cement, Portland pozzolana cement and Portland limestone cement. The company´s products are marketed under various brand names which include Power Plus Cement, Nguvu Cement, Supaset, Multi Purpose and Plasta Plus. Bamburi Cement also owns and manages a world class nature and environmental park that was developed from the rehabilitation quarries. The company has its operations in Kenya and Uganda. The company is headquartered at Nairobi, Kenya.
In this study, Bamburi Cement has used the total debt-to-assets (or debt-to-capital employed) as a measure of its capital structure. Total debt includes interest bearing long-term and short-term debt. Assets include fixed assets and those current assets that are financed by debt.
This paper is divided into several sections namely; Definition of Capital Structure; Rajan and Zingales (1995) argue that the definition of capital structure would depend on the objective of the analysis. For example, for agency-problem related studies, capital structure maybe measured by total debt-to-firm value ratio., Relevance of Capital Structure; The prevailing argument, originally developed by Modigliani and Miller (1958), is that an optimal capital structure exists which balances the risk of bankruptcy with the tax savings of debt. Once established, this capital structure should provide greater returns to stockholders than they would receive from an all-equity firm.
Evaluation of the Capital Structure of Bamburi Cement Company; Bamburi's debt-asset ratio of 22.9% and capitalization ratio of 24.2% shows that it is less dependent on leverage, i.e., money borrowed from and/or owed to others. As seen elsewhere in this paper Bamburi Cement operates in a highly dynamic environment and their choice of capital structure measure resonates well with what modern thinking is, about, finding the right or best financing mix. Firms in industries characterized as exhibiting high levels of dynamism are more successful if they had relatively low levels of debt.
One of the dramatic changes created by the expanding global economy is the increase in the rate of change within industries. And as more industries experience greater levels of change, the use of debt-centered governance will prove less effective in the near future.
The other areas covered include; determinant factors of Capital Structure, Limitations in improving Capital Structure and How to improve Capital Structure.
INTRODUCTION
Bamburi Cement Ltd. was founded in 1951 by Felix Mandl - a director of Cementia Holding A.G. Zurich. Cementia later went into partnership with Blue Circle PLC (UK). In 1989, Lafarge, the world's largest building materials group, acquired Cementia, and thus became an equal shareholder with Blue Circle. Lafarge bought Blue Circle in 2001 to become the largest building materials company in the world and Bamburi Cement Limited principle shareholder.
It's first plant Mombasa started production in 1954 with annual capacity of 140,000 tonnes of cement. Today the Mombasa based plant has the capacity to produce of 1.1 million tonnes.
In 1998, a new one million tonne per annum clinker grinding plant was added just outside Nairobi, increasing the total production capacity to 2.1 million tonnes. With the new plant, Bamburi Cement has been able to improve it's service to Nairobi and upcountry markets, through speedier and more efficient packing turn around time, The rail sliding at the Nairobi plant has also facilitated sales to Western Kenya and Uganda.
Bamburi Cement is the largest cement manufacturing company in the region and it's Mombasa plant is the second largest cement plant in sub-Saharan Africa. It is also one of the largest manufacturing export earners in Kenya, exporting 28 per cent of its production in 1998 (29 per cent). Export markets include Reunion, Uganda and Mayotle. In the past, they have also included Mauritius, Sri Lanka, The Comoros, Madagascar, Seychelles and the Congo.
Bamburi is primarily engaged in the manufacture and sale of cement and cement related products. Bamburi also owns and manages a world class nature and environmental park developed from rehabilitated quarries.
Bamburi has financed its various expansion projects through debt over the last six years although its capital structure is a mix of debt and equity. However, there is a reduction in borrowings propping up the cash balances that are expected to fund expansionary capital expenditure.
Firms are free to choose whatever mix of debt and equity or capital structures they desire to finance their assets, subject to the willingness of investors to provide such funds. In some firms, such as Chrysler Corporation, debt accounts for more than 70 percent of the financing, while other firms, such as Microsoft, have little or no debt.
A firm's capital structure should attempt to determine what its optimal, or best, mix of financing should be. Determining the exact optimal capital structure is not a science, so after analyzing a number of factors, a firm establishes a target capital structure it believes is optimal, which is then used as a guide for raising funds in the future. This target might change over time as conditions vary, but at any given moment the firm's management has a specific capital structure in mind, and individual financing decisions should be consistent with this target.
1.1 Definition of Capital Structure
Capital structure could be defined in different ways. In the US, it is common to define capital structure in terms of long-term debt ratio. In a number of countries, particularly the emerging markets, companies employ both short-term and long-term debt for financing their assets, including current assets. It is also common for companies in developing countries to substitute short-term debt for long-term debt and roll over short-term debt. Hence, it is more appropriate and particularly in the context of developing economies, to define capital structure as total debt ratio. Rajan and Zingales (1995) argue that the definition of capital structure would depend on the objective of the analysis. For example, for agency-problem related studies, capital structure maybe measured by total debt-to-firm value ratio. Debt could be divided into its various components, and numerator and denominator could be measured in book value and market value terms. In this study, Bamburi Cement has used the total debt-to-assets (or debt-to-capital employed) as a measure of its capital structure. Total debt includes interest bearing long-term and short-term debt. Assets include fixed assets and those current assets that are financed by debt.
1.2 Relevance of Capital Structure
1.3 Evaluation of the Capital Structure of Bamburi Cement Company
In this study, Bamburi Cement has used the total debt-to-assets (or debt-to-capital employed) as a measure of its capital structure. Total debt includes interest bearing long-term and short-term debt. Assets include fixed assets and those current assets that are financed by debt.
1.5 Determinant factors of Capital Structure
Factors Determining Capital Structure
Trading on Equity- The word "equity" denotes the ownership of the business. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to supplementary profits that equity shareholders make because of issuance of debentures and preference shares. It is based on the thought that if the rate of dividend on preference capital and the rate of interest on borrowed capital is lower than the general rate of company's earnings, equity shareholders are at advantage which means a company should go for a well thought-out blend of preference shares, equity shares as well as debentures. Trading on equity becomes more significant when expectations of shareholders are soaring.
Degree of control- In a business, it is the directors who are so called elected representatives of equity shareholders. These members have got maximum voting rights in a concern as compared to the preference shareholders and debenture holders. Preference shareholders have reasonably less voting rights while debenture holders have no voting rights. If the company's management policies are such that they want to preserve their voting rights in their hands, the capital structure consists of debenture holders and loans rather than equity shares.
Flexibility of financial plan- In an enterprise, the capital structure should be such that there is both contractions as well as relaxation in plans. Debentures and loans can be refunded back as the time requires. While equity capital cannot be refunded at any point which provides inflexibility to plans. Therefore, in order to make the capital structure viable, the company should go for issue of debentures and other loans.
Choice of investors- The company's policy commonly is to have different categories of investors for securities. Therefore, a capital structure ought to give adequate choice to all kind of investors to invest. Adventurous and bold investors generally go for equity shares and loans and debentures are generally raised keeping into mind conscious investors.
Capital market condition- In the lifetime of the company, the market price of the shares has got an important influence. During the depression period, the company's capital structure generally consists of debentures and loans. While in period of inflation and boons , the company's capital should consist of share capital generally equity shares.
Period of financing- When company wants to raise finance for short period, it goes for loans from banks and other institutions; while for long interval it goes for issue of debentures and shares.
Cost of financing- In a capital structure, the company has to look to the factor of cost when securities are raised. It is seen that debentures at the time of profit earning of company ascertain to be a cheaper source of finance as compared to equity shares where equity shareholders demand an extra share in profits.
Stability of sales- An established business which has a growing market and high sales turnover, the company is in position to meet fixed commitments. Interest on debentures has to be paid regardless of profit. Therefore, when sales are high, thereby the profits are high and company is in better position to meet such fixed commitments like interest on debentures and dividends on preference shares. If company is having unstable sales, then the company is not in position to meet fixed obligations. So, equity capital proves to be safe in such cases.
Sizes of a company- Small size business firms capital structure generally consists of loans from banks and retained profits. While on the other hand, big companies having goodwill, stability and an established profit can easily go for issuance of shares and debentures as well as loans and borrowings from financial institutions. The bigger the size, the wider is total capitalization.
1.6 Limitations in improving Capital Structure
Four problems that tend to increase as leverage escalates: (1) a growing risk of bankruptcy; (2) lack of access to the capital markets during times of tight credit; (3) the need for management to concentrate on finances and raising additional capital at the expense of focusing on operations; (4) higher costs for whatever additional debt and preferred stock capital the company is able to raise. Aside from the unpleasantness involved, it is noted that each of these factors also entails tangible monetary costs.
1.7 How to improve Capital Structure
Effective capital structure management can he achieved through consistent use of the following strategies.
strategy 1. organize for effective capital structure management
The essential building blocks for effective capital structure management include obtaining and providing education, establishing the team, and defining the organization's attitude toward risk.
Education ensures that the board of directors and senior leaders are on the same page about the benefits and importance of effective capital structure management to the organization's competitive financial performance.
strategy 2. determine the appropriate level of debt capacity
Debt capacity, the amount of debt an organization is capable of supporting within a particular credit rating profile, establishes the parameters of the debt portion of the capital structure. The figure must expand each year if the organization wants to remain strategically and financially competitive.
strategy 3. determine the optimal mix of debt-to-equity financing and traditional-to-nontraditional financing
Once an organization determines its debt capacity, it knows how much it can borrow in the debt markets and how much capital will need to come from other sources, both traditional and nontraditional. Targets for the appropriate debt to equity ratio are based on debt capacity, rating agency benchmarks, and tolerance for risk.
strategy 4. select and achieve the "right" relationship between fixed-rate debt and variable-rate debt
Every organization has a different "right mix" of fixed-rate to variable-rate debt. The mix is dependent on the organization's bond ratings, availability of bond insurance, amount of free cash, investment policy and the board's attitude toward risk, and changing interest rates.
strategy 5. diversify variable-rate debt and avoid exposure to any one form of risk
Variable-rate debt comes with certain risks, including basis risk, put risk, bank risk, credit risk, and failed auction risk. A diversified variable-rate debt portfolio can mitigate these risks and lower the organization's overall cost of capital.
strategy 6. pursue a level debt structure with the longest possible final maturity
The average life of an organization's overall debt and its amortization and maturity structure have a significant impact on current and predicted cash flow and debt capacity. The lowest net present value of any payment structure is generally the longest amortization obtainable in the capital markets and permitted by tax law.
strategy 7. monitor and continuously adjust the debt portfolio
To maintain maximum flexibility, lowest possible interest costs, and acceptable levels of risk, organizations must proactively and regularly adjust their portfolios as changes occur in the market and in the portfolios themselves. The importance of effective and efficient capital structure management to an organization's long-term competitive strategic financial performance cannot be overemphasized. Use of the above capital structure management strategies will increasingly reward organizations with the know-how and muscle to achieve a strategic financial competitive advantage.
