Housing Finance seeks long-term capital for growth

Housing Finance (HF) is planning to raise long-term capital to allow it expand its mortgage business and address the current mismatch exposure between short-term deposits and the long-term lending associated with provision of mortgage facilities.

The sole mortgage provider –after Savings and Loans was absorbed into KCB operations- intend to raise the capital to allow it the legroom to grow its business in an environment where demand for houses is way ahead of supply.

“We are looking at the prospects of raising long-term funds to match our business operation as short-term customer deposits cannot support our operations,” said Mr Frank Ireri, HF managing director.

According to Mr Ireri their mortgage facilities tend to have a repayment period of up to 25 years.

In 2009, the mortgage provider’s loans and advances amounted to Sh14.5 billion while customer deposits were Sh12.2 billion.

However, Housing Finance indicates that the situation is normal as its business is long-term.

“The situation is not an anomaly as we are a long term lending financial institution whose lending business is not solely dependent on the level of deposit we are able to mobilise”, said Sam Waweru the firm’s finance and administration director.

Mr Waweru indicated that the practice of mortgage providers the world over is dependent on other financing models and not customer deposits.

Such models include securitisation, access to government funds and use of long term corporate bonds.

Strategic partner

Financial analysts reckon that the plan to source for long-term funds will allow the firm to match its asset with liabilities hence providing cover for any potential risks of exposure.

“The existing options for Housing Finance for accessing long-term funds include issuing a corporate bond, carrying out a rights issue or inviting a strategic partner to take up a stake in the firm,” said Bonice Obure Misoka an investment analyst with British American Asset Managers (BAAM).

According to Mr Misoka the options available will be dictated by the expected response from the market but the corporate bond is the best option.

In terms of a corporate bond, Mr Misoka said that the current high appetite for bonds in the market will likely lead to a complete uptake.

The bond market has lately been active with various corporate businesses offering bonds which have attracted oversubscription.

A total of Sh40 billion has been raised through the corporate bond market.

Similarly, the government has managed to offer three infrastructural bonds worth Sh54 billion. All the three bonds were over subscribed.

Mr Misoka adds that the falling rates of bonds from 12 per cent to the current nine per cent are likely to be more enticing due to the lower cost of the funds.

However, the mortgage provider will have to contend with the challenge of the maturity period of the bond as the bond market has managed bonds with tenors of 10 years.

For HF this is likely to be a shorter tenor given the length of their mortgages.

The longest bond offered by the government has a maturity period of 20 years.

The Central Bank of Kenya is mulling over plans to introduce a 25-year bond which will provide the yield curve for longer tenor bonds.

The other options such as a right issue and strategic partner are less viable for the firm.

A rights issue unlikely to attract full uptake as the equity market is subdued.

In addition, the firm issued a rights issue in 2008 hence another one is not likely to muster the full participation of shareholders.

Similarly, the need for a strategic partner may not be a viable choice as it would lead to dilution of existing shareholding.

The last strategic partner was CDC private equity which exited by selling its stake to Equity Bank and British American Insurance Company.