Rechanging Ramcar’s battery

Ramcar Inc. chairman and chief executive officer Manuel Agustines has a sure-fire method for predicting growth in gross national product. He looks at the movement of motor vehicle battery sales, where Ramcar and its sister-companies currently control 65% of the market. "My projection has always been on the dot. In times of slow growth, people don’t use their vehicles as often," said Agustines, whose hair has turned completely white in the past month.

Just as clearly, he saw the loosely structured Ramcar group could no longer service its P8-billion debt to 19 creditor-banks if it is to complete its ongoing expansion program by 2003. "It was a difficult decision to make, for the company and for myself," said Agustines, who has been CEO of the 82-year-old company since 1969. "We have been never been in this situation before."

Ramcar unilaterally declared a moratorium on its loans last month.

What went wrong

Like many companies, Ramcar’s finances began to unravel after the 1997 Asian crisis. Ramcar was two years into a modernization program that would make its plant in Sta. Maria, Bulacan the most efficient and cheapest battery producer in Southeast Asia. It was also investing in non-core businesses such as food, banking, transportation and real estate that expanded the group to 40 companies, many of them special purpose vehicles that have since become dormant.

"Interest rates for peso loans went up. At one time, we were paying 27%," said chief financial officer Jesus Montemayor. "In the end, we were borrowing money to keep our interest payments current."

From 1997 to the third quarter of this year, the Ramcar group paid P5 billion in interest to keep its P8-billion exposure updated. Of the P8 billion, Ramcar owed P4.3 billion to four banks, with Bank of the Philippines topping the creditors at P2.2 billion and Land Bank of the Philippines at P1 billion.

Most of the loans were unsecured. "Early on, I met with our creditor-banks in a Makati hotel. I told them we didn’t have enough collateral to back future loans," Montemayor said.

The banks, however, agreed to lend Ramcar more money without collateral. The last loan extended to Ramcar middle of this year was worth P1 billion. Three banks–Citibank, Equitable PCI Bank and Rizal Commercial Banking Corp. – each took up a third of the total exposure.

"As far as the industry was concerned, Ramcar was a sure thing. It was the dominant player in the local battery market. Its books were given the seal of good housekeeping by the largest auditing company in the country," said the president of a creditor-bank.

Another bank president noted Ramcar remained liquid. "It was selling what it produced," he said.

What the banks didn’t know was the total amount of Ramcar’s receivables from its sister companies. "There was no consolidated financial statement to give us an idea how big Ramcar’s exposure was," a banker said.

Based on the five Ramcar companies audited by SGV & Co., total debt – which tallied with bank confirmations – was P4.5 billion. The 2000 audit of SGV carried a qualified opinion on the quality of the receivables held by the five companies, including Ramcar, Inc.

Competitive

In the past year, Ramcar’s local market share has dropped from 80% to 65% with the entry of cheaper, imported substitutes. A Korean battery, for example, can be produced at $12 while the average cost of producing a Philippine-made battery is $15.

"We want to produce a competitively-priced battery for export," said Agustines. "We want to produce a battery at less than $12 in time for 2003." By then, the tariff for imported finished battery will be reduced from 15% to 5%.

Ramcar produces the country’s two top-selling brands, Oriental and Motolite, in two plants. The older and less efficient Novaliches plant has a production capacity of two million. It makes the old type of battery which needs water to be changed every 18 months and which is preferred in the countryside because it has a longer shelf life.

The newer Sta. Maria plant produces the new type of battery, which does not need charging. The plant, which is currently doing half of its production capacity of six million, is fully integrated. The smelter melts down used battery casings and imported scrap lead, the main raw material in the production of battery.

"We need an additional P750 million to complete our modernization program," Agustines said. "By then, we will be able to service the 2.5 million domestic market and still increase the share of exports from our current 40% of total production to two-thirds of our production because we will be competitively priced with other manufacturers in the region."

Shared pain

Initially, part of the cost of modernizing Ramcar would have been raised through the capital market. "We wanted to raise money through an initial public offering," Montemayor said. "When the local stock market hit bottom, we hoped we could raise the money in Singapore." The Singapore market took a nose dive middle of this year.

With no visible means of raising additional equity quickly, Ramcar had to make a decision. "It was a choice of paying the banks or pushing through with our modernization," said Agustines. "Paying the banks was a short-term solution. If we didn’t complete our program, we would have done what we did now two years down the road but on a larger scale."

In ongoing talks with its creditor-banks, Ramcar has come up with a two-part restructuring plan that will bring down its debt to P2 billion, a level which it can easily service. One, Ramcar proposes to pay down P6 billion of the outstanding P8-billion exposure through a debt-for-asset swap. Real estate, most of which are located in Bulacan, will be used to settle the debts.

Two, the balance P2-billion worth of loans will be repaid over a 10-year period at lower interest. A moratorium on the payment of the principal loan amount has also been asked.

Although the creditor-banks have initially balked at the Ramcar proposal, Ramcar negotiators, Monetemayor and financial advisor Monico Jacob, seem optimistic a deal will eventually be worked out. At the heart of the negotiations is the viability of the 12 companies that make up Ramcar’s battery group.

"Through our actions, we have shown our willingness to share the pain," said Agustines. "Now, the banks have to show their willingness to take a hair cut, no matter how severe."