Moody’s downgrade raises red flag on Shelter Afrique books

Pan-African housing financier Shelter Afrique has lost its top credit rating in what has been attributed to recent concerns over the state of its finances.

Moody’s, a ratings agency, said Friday that it had downgraded Shelter Afrique’s long-term issuer rating from Ba1 to Ba3, and placed it on review for further downgrade pending an internal investigation. 

A rating downgrade is significant because it can affect how much it costs an institution to borrow from international financial markets.

In theory, a high credit rating means a lower interest rate (and vice versa). Moody’s rating scale runs from a high of Aaa to a low of C, comprising 21 notches that are divided into investment and speculative grades.

Moody’s cited the housing financier’s deteriorating financial position marked by a weaker liquidity position as reason for its decision. 

“The key driver of the two-notch downgrade is the material, structural deterioration in Shelter Afrique’s credit metrics, driven by rising leverage, deteriorating capital buffers and the weaker liquidity position,” the ratings agency said.

The bank, said the agency, has had limited success in securing already committed capital from its shareholders, whilst expansion of the loan book towards on-lending to financial intermediaries also risks undermining already weak shareholder support. 

Moody’s said Shelter Afrique has experienced a persistent deterioration across most of its credit fundamentals, which appear to reflect “structural, rather than cyclical drivers.” It also cited Shelter Afrique’s borrowing spree to fund its operations.

“Due to limited increases in capital subscriptions from its sovereign shareholders, and with weak profitability lowering its ability to generate capital organically, Shelter has relied heavily on debt to fund the expansion of its balance sheet,” said Moody’s. 

The ratings agency also said that rising leverage has seen Shelter Afrique’s capital buffers deteriorate significantly.

“Capital adequacy, as measured by the asset coverage ratio, has halved compared to when we initially rated the bank in 2011. Leverage has increased by 1.7x, and the recent loosening of the bank’s liquidity policy coupled with its debt-funded growth strategy point to a structurally weaker liquidity position,” Moody’s said.

The negative assessment comes barely a fortnight after leaked Shelter Afrique documents showed how top managers were looting its funds through creative accounting and subprime lending that is now under investigation.

READ: Bad loans put Shelter Afrique boss in eye of a raging storm

Documents seen by the Business Daily showed that the company’s managing director, James Mugerwa, has been dishing out subprime mortgages to unqualified borrowers, resulting in a steep rise in non-performing loans.

At least 59 per cent of Shelter Afrique’s $246.3 million (Sh24.63 billion) loan book was classified as non-performing by February 2016, according to documents addressed to the lender’s board of directors and financiers.

On Wednesday, Moody’s also raised concerns over the direction of the bank’s portfolio growth in recent years — citing in particular, the channelling of its lending through financial intermediaries and risks undermining Shelter’s direct relevance to sovereign shareholders.

The bank has in recent years had limited success in securing already committed capital from shareholders, Moody’s said.

“Shelter Afrique’s portfolio is also exposed to an increasingly challenging economic environment, including exposures in Zimbabwe equivalent to 10 per cent of the loan book, and US dollar denominated loans in Nigeria which are at higher risk of impairment following the naira devaluation this year.

The Bank’s Kenya portfolio has also faced growing problems over the past year, including marketing risk with projects completed but not selling, and now accounts for more than half of total arrears,” the ratings agency added.