CMA says row over NBK’s loan pact delaying Sh13bn rights issue

Capital Markets Authority chief executive officer Paul Muthaura. PHOTO | SALATON NJAU
Capital Markets Authority chief executive officer Paul Muthaura. PHOTO | SALATON NJAU 

Sharp differences between the Treasury and the National Social Security Fund over the interpretation of a loan agreement signed between the National Bank of Kenya and the government have stalled the lender’s Sh13 billion rights issue, Kenya’s capital markets regulator has disclosed.

Capital Markets Authority (CMA) boss Paul Muthaura said in an interview the dispute is caused by the fact that the deed of covenant creating the NBK preference shares allowed for conversion to common stock but the shareholder approval termed them as non-redeemable.

“The loan agreement creating the preference shares states that the shares are convertible but the resolution passed differs and states the shares are non-convertible,” said Mr Muthaura in an interview.

“It is because of this conflict that the NBK rights issue didn’t proceed.”

The Treasury, which controls a majority of the 1.135 billion preference shares, wants them converted to ordinary stock.


NSSF, however, prefers that the Treasury redeems the shares at a premium of 25 per cent.

NBK’s non-cumulative preference shares were created in 2003 when long-term loans totalling Sh5.675 billion advanced to the lender by NSSF and the government were converted into equity.

The Treasury holds 900 million preference shares while NSSF has 235 million or a fifth of the special stocks, each valued at five shillings.

The State-run pension scheme is the largest shareholder of NBK with a 48.05 per cent stake while the Treasury directly owns 22.5 per cent of the bank.

The cash call, which received shareholders’ approval in June 2013, was meant to help NBK shore up its capital and boost thinning regulatory ratios, revamp its core banking IT platform, and fund both local and regional expansion.

The CMA has consequently thrown its weight behind the Treasury, saying the preferred stocks should be converted to ordinary shares.
“In this conflict, then the document that created the shares is supreme,” the CMA chief said.

There have been queries as to why the CMA declined to approve NBK’s rights issue despite the fact that NSSF had offered to underwrite the offer by committing to buy any untaken shares.

A one for one ratio in converting these preferred stocks will see The Treasury take majority control of NBK and greatly dilute NSSF’s stake as well as that of other smaller shareholders.

The Treasury will have 963 million shares or 68 per cent of NBK if the preference shares are converted to ordinary stock in a one for one ratio; while NSSF’s holdings will be nearly halved to 26 per cent or 369.5 million shares.

Other top owners of NBK set for dilution include Kenya Re and billionaire businessman Ephraim Maina.

NBK will once again be asking shareholders to deliberate on the delayed rights issue at the upcoming annual general meeting slated for June 3.

NBK reported an unprecedented Sh1.15 billion loss for the period ended December 2015 and a fortnight later sacked managing director Munir Sheikh Ahmed and two other executives.

NBK shares on Friday closed at Sh8.95 per share, meaning The Treasury and NSSF would enjoy a 79 per cent premium in converting their preference shares to common stock at the current price.