The season for banks to announce financial results for nine months to September is here. And Jamii Bora Bank, which was in breach of liquidity ratio in June, will also lay bare its performance.
CEO Samuel Kimani, who is also the Chairman of Nairobi Securities Exchange, has just survived the scare of buying into the future of debt-ridden Kenya Airways (KQ). But it has not been an easy run.
Alongside Kenya’s largest bank by customer base, Equity Bank, and pan-African lender Ecobank, they had fought against being forced to convert their loans in KQ into equity. The battle went up to Court of Appeal. The lenders lost.
When dust had settled, only Jamii Bora Bank was allowed not to convert its debt to equity. The rest of the10 banks now find themselves tied to KQ longer than they had thought.
“We agreed to leave Jamii Bora on the balance sheet of KQ and it will be paid over five years because its debt was much smaller relative to everybody else’s,” former KQ boss Mbuvi Ngunze said.
According to Ngunze, this has been the “most complicated” debt restructuring in Kenya. For banks, it has been one in many of the struggles they have found themselves in with big borrowers.
Jamii Bora had loaned KQ Sh412 million and will be repaid over the next five years. The bank’s boss told Weekend Business that he believes that other lenders may have been unable to get the same deal because they had booked larger term loans.
“The facility we gave Kenya Airways was a short-term debt pegged on a specific transaction: The sale of their hangar space in London. After the sale, part of the debt was repaid and we renegotiated terms for the balance,” said Mr Kimani.
As at June, the bank had only Sh147.5 million as cash, condemning its liquidity ratio to 24.3 percentage points below the Central Bank of Kenya requirements.
But after KQ, he has another headache to deal with. His bank also has its money stuck in Uchumi Supermarket, which is cash-strapped at the moment. In 2014, the bank sunk Sh452 million in Uchumi, making it the single largest shareholder. But later on, it felt cheated.
“As a listed company, we got the transaction approved by all regulators but the information memorandum was a work of fiction. It did not reflect what we found there,” Mr Kimani told the press at an Annual General Meeting last year.
In January this year, the lender moved to court in an attempt to recover the money. This was on the background of forensic audit by KPMG that showed that investors may have relied on misleading report to invest in the retailer.
While Jamii Bora needs money, its two key creditors— KQ and Uchumi —also need money dearly.
KQ had said in court papers that international banks were ready to confiscate its planes if it did not come clear on its debt restructuring plans. For Uchumi, it is in negative working capital and has even had to borrow money to pay salaries.
Both Ecobank and Equity have swapped their loans for shares. The same has happened for Kenya Commercial Bank (Sh0.82 billion), Commercial Bank of Africa (Sh3 billion), Co-operative Bank (Sh3.3 billion), I&M Bank (Sh0.82 billion), NIC Bank (Sh2.06 billion), Chase Bank (Sh0.72 billion), National Bank (Sh3.5 billion) and Diamond Trust Bank (Sh2.06 billion).
The 10 will now own 38.1 per cent stake in KQ through the newly-created KQ Lenders Company 2017 Ltd. The combined value of the money that 11 banks had put in KQ was Sh23 billion.
For KCB, its troubles with loans extended to retailers is not new. Last year, some suppliers moved to court seeking orders to wind up Uchumi for failing to service debts. But KCB and United Bank for Africa (UBA), both which at that point were owed by Uchumi a total of Sh2.5 billion, did not favour the move.
KCB was owed Sh900 million and at one point even held on Sh400 million, being part of proceeds the retailer received from disposing its Ngong Road property.
For long, banks have blamed personal borrowers for the piling loan book but this is now changing. Corporates are proving to be a thorn in their flesh.
An analysis by Standard Investment Bank shows that in 2016, business sector’s non-performing loans stood at 10.4 per cent. In September, CBK governor Dr Patrick Njoroge also said that large firms were the ones that had driven August’s NPL ratio to 10.7 per cent.
Apart from KQ headache, Equity Bank has another firm to deal with — Rift Valley Railways. Together with four international lenders, Equity risks losing Sh1.7 billion it had loaned the railway operator. RVR lost its concessions to run the Kenya-Uganda Railway and currently has no revenue stream.
The National Treasury has already said that it will not absorb RVR loans. The railway operator has seen termination of its 25-year concession contract and this amplifies chances of defaulting or delaying to pay.
“To the best of my recollection, the Treasury never guaranteed any of the loans,” Mr Rotich was quoted in one of the local dailies.
While announcing performance for the first nine months of 2017, Equity Bank CEO James Mwangi said that NPL ratio had reached 7.4 per cent. However, he said that he had managed to recover money that had been stuck in large enterprises for six months.
The country’s retail sector story looked rosy and banks were generous in extending money to the supermarkets.
However, the latest development involving Uchumi and Nakumatt has exposed the thorns in the sector.
At least 120 creditors are now chasing after Nakumatt, which has closed as many as 20 branches as it struggles to remain afloat. Its debt is in the region of Sh40 billion and it is facing danger of either liquidation or insolvency.
Again, KCB, NIC and Diamond Trust Bank come into focus. They had lent Nakumatt money. Others who sail in this troubled boat are Standard Chartered Bank, Stanbic Bank and Barclays Bank. Others are Bank of Africa, Habib Bank and Guarantee Trust Bank.
Family business-focused lender M Oriental Bank, which used to do business with Nakumatt is among the few lucky ones. In a previous interview with The Standard, the bank’s CEO Rakesh Kashyap said that the Sh150 million loan that the bank had advanced to the retailer in August 2012 was fully repaid in February 2013.
He said that shareholders were on his neck to explain the level of exposure he had at Nakumatt after our previous story listed his bank as among those owed money by the retailer.
“As of now, we do not have any exposure in Nakumatt. We do not have any business with them. Going by our size, we are very cautious not to take such a big hit,” said Mr Kashyap.
Investment firm TransCentury, whose star has dimmed, is also another firm that has given banks sleepless nights. In June this year, it renegotiated with banks to push forward the repayment of Sh2.4 billion in order to ease pressure on its cash flows.
The company and its subsidiaries had borrowed about Sh5 billion from local and regional lenders. About half of it was to mature last year but it was the same time the firm was to redeem its Sh8 million convertible bond.
Affected banks in the June re-negotiation included Equity, Chase Bank and Standard Chartered Bank of Tanzania.
Here, Equity was the biggest lender with Sh3.1 billion loan it offered at 8.5 per cent.
In September, Dr Njoroge said that about Sh5 billion was stuck in the manufacturing sector with two cement companies and a plastic firm owing banks the bulk of the money. In real estate Sh3.9 billion was also non-performing.
Even the Government, which is seen as a risk-free borrower, is also taking long to repay banks. As at end of August, Sh2.8 billion was stuck at national and devolved governments due to delayed payments.
For banks, as the Kenya Airways dust settles, they now have a new company they never thought about when they put their Sh23 billion in the national carrier. As KQ does its landings and taking off every day, banks will be crossing fingers that their money will not be lost.
As the fate of Nakumatt is being awaited, the question on what the company really owns is weighty. If it is put under liquidation, it will mean assets being sold and debtors paid according to how their debts rank. If it is put under receivership, it will mean a longer wait for banks.
From the books of Kenyan history, the story of receivership reads like this: Kenya National Taxi Corporation (Kenatco) once took a loan of Sh22.4 million in 1990s and in 2017, the loan has attracted interest and reads over Sh1.2 billion. The firm is now on its 21st year under receivership.
The casualty in this story was Industrial and Commercial Development Corporation (ICDC), a government-owned development finance and investment company. It’s a story banks would not wish for Nakumatt.
And if the words of Benjamin Franklin, a renowned polymath in US, that creditors have better memories than debtors, then banks are having nightmares.