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LOCAL companies are struggling to repay loans they borrowed due to punitive interest rates being charged by local financial institutions.Most firms listed on the Zimbabwe Stock Exchange survived on expensive short-term debts and they are now struggling to repay the funds.The inability for companies to hold successful rights issues due to the prohibiting liquidity environment as well as related high costs to carry out such a fund raising exercise has forced most companies to resort to debt financing in order to lift up their production poten- tial.With sales remaining subdued due to depressed demand on the economy, companies continue to face working capital challenges, which are negating their earnings generating potential.As a result of the liquidity challenges the economy continues to face, it has been extremely complex for local companies to access funding at a reasonable cost, forcing them to borrow short dated and expensive money on the local money market.

Kingdom Stockbrokers said sovereign risk that the nation carries has also rendered it almost impossible for companies to access lines of credit from external financiers, who are so sensitive to the credit rating of the borrowing nation.Only a few companies tried the rights issue route to recapitalise their business but the support was limited due to lack of money on the market.Private placements are proving to be the only alternative route despite possibilities of diluting existing shareholders equity.Indications from the international market are that investors from America are taking advantage of cheap money in their country to come and invest in emerging markets where they expected high returns.Going by this argument, liquidity levels are expected to improve and rates are also expected to go down.

Lending rates in the United States of America are between 1 and 3 percent and locally, interest rates are between 20 and 25 percent.With low activity on the local bourse more investors are e xpected to flock to the local money market and this will force rates to go up.Cairns Holdings Limited disclosed in their recent results that in the absence of direct capital injection, its management sustained production through borrowings at punitive rates from the local money market, a development that resulted in the company posting a loss of US$1.9 million.A high interest rate bill on its US$3.8 million debt at an average rate of 35 percent chewed up the bulk of the company’s operating profit in only four months to December 2009. Cairns said that it was paying around US$200 000 a month in interest payments alone as a result of the debt.Hotel group African Sun also disclosed that the cost of its borrowing currently stands at 29 percent, with that of 2009 standing at 38 percent resulting in the company incurring finance costs totaling US$431 948 for the period between April to September 2009.The company had to bank on expensive short-term debt finance to enhance unutilised capacity, while working on a rights issue of US$7.5 million that was 61 percent subscribed.