CPJ gets reprieve from bondholders
When Caribbean Producers Jamaica’s new technology platform collapsed at it’s commissioning, it not only disrupted customer orders, but created a spiral that derailed the company’s earnings and put at risk its undertakings to creditors who hold its bonds.
On August 9, the company secured an agreement from creditors who voted to give the distribution company another six months to report back on its compliance with covenants on the debt related to the CPJ Fixed and Rate Notes due 2023. The initial amount covered by the bonds was $500 million.
It buys the company time while auditors complete their review of CPJ’s yearly accounts for the period ending June 2019. That audit will give CPJ the information it needs to quantify the impact of various accounting standards on its ratios.
Caribbean Producers CEO David Lowe says it was CPJ itself that approached bondholders after realising in the initial stages of the audit that the company “could be in breach of debt covenants”.
“We’ve been looking at the likelihood since first quarter. We knew there would be challenges, and in line with our governance principles we made it clear all along,” Lowe told the Financial Gleaner.
That early outreach to bondholders, he said, was in line with the company’s ethos, which has included the issuing of profits warning in the past.
Lowe explained that the company saw two possible areas where there would be problems: new IFRS rules and a breach of covenants under the 2023 bond.
“In the preparation of our final accounts for the FY, we noted that the new IFRS rules are applicable to our accounts going forward,” said Lowe. “We also noted that … one of our debt covenants would likely be affected by the lower profit performance at the end of the FY for the reasons noted,” he added, referring to the failed technology system that resulted in a US$1-million write-off for the company, plus other losses due to indirect costs such as storage, mistimed shipments and other logistical problems.
Major capital projects
In recent years, CPJ announced two major capital projects: a new warehouse management system to manage the large portfolio of inventory and eventual integration with the company’s supply chain for the region; and a 56,000 square-foot distribution centre to complement the existing 120,000-square-foot warehouse.
The warehouse was completed on time and on budget but the new IT system, which Lowe said was meant to be the backbone of the warehouse management system, failed on implementation at the start of the past financial year. CPJ was hit by increased supply chain and inventory management costs, especially in relation to its fixed contract business with hotels.
“There were, for example, excessive variable costs associated with the container importations, which average around 120 per month, including frozen items; and raw materials had significant delays which impacted manufacturing and delivery of products,” Lowe explained.
CPJ’s audited results are pending, but for the nine months ending March, the company made a net loss of US$982,215. Revenues were flat at nearly US$82 million.
Lowe said CPJ reached out to bondholders through trustee Scotia Jamaica Investments Limited towards the end of July to report that they were in danger of breaching the debt covenant, and a meeting was convened for August 9.
“At the end of the meeting, the noteholders were aware of the extraordinary year due to the fallout from the IT issues at the start of the fiscal year 2018-19 and the plans for continued growth in the new fiscal 2019-2020,” Lowe said.
Noteholders approved the waiver of the covenants as at June 30, 2019, in a notice to the Jamaica Stock Exchange. The waiver for the effect of the new IFRS rules: IFRS9, covering accounting provisions on receivables; IFRS15, covering revenue from contracts with customers; and IFRS16, effective June 2020, covering accounting for leases.
The conditions that CPJ has to satisfy under those rules have been deferred until February 28, 2020. However, Lowe declined to offer more specifics about the performance targets, citing stock market reporting rules.
UPDATE: The value of the bond was incorrectly denoted in US currency and was adjusted.