Treasury to earn Sh4.5bn from National Bank debt settlement

State-controlled National Bank is seeking shareholders’ support for a planned fundraising effort that will enable it to retire the interest-earning preference shares that have been weighing down its profits in the past 10 years, forcing it into a dividend payment drought.   

The bank, which is one of Kenya’s oldest, wants to use cash raised from an impending rights issue to pay off the government and the National Social Security Fund (NSSF) – its single largest shareholders who are also the major beneficiaries of the preference shares.

Shareholder approval is needed to get the rights issue plan off the ground in the next financial year, people familiar with the matter said.

National Bank will on May 30 be seeking its owners’ approval to redeem existing non-cumulative participating preference shares using the proceeds of the rights issue. Settlement of the debt could earn the Treasury up to Sh4.5 billion going by the par value of the shares. 

Removing the interest-earning preferential shares from its books could also help National Bank to close a survival plan it rolled out in 1998 to deal with the huge pile of bad loans it had accumulated through dubious lending to political cronies of former president Daniel arap Moi.

It is the challenge of bad loans that forced the bank to convert the Treasury and the NSSF debt to preference shares in a deal worth Sh5.6 billion – a move that also helped it to comply with capital adequacy requirements.

Though the arrangement succeeded in keeping the lender afloat, it has continued to drain its resources and scared off strategic investors.

National Bank has not disclosed the price at which the shares will be redeemed but it is expected that the holders will negotiate rather than use the par value to determine debt.

READ: National Bank picks advisers ahead of Sh13bn rights issue

National Bank’s share on Friday traded at Sh31.25 at the Nairobi Securities Exchange against a par value of Sh5 and the parties are expected to find a settlement price upon getting the green light from shareholders.

National Bank has in the past stated that the preference shares are not redeemable, leaving conversion as the only way out.

The bank’s chairman, chief executive and company secretary did not respond to questions on the subject.

The preference shares have been earning a negotiable interest rate of between zero and six per cent annually besides entitlement to dividend earnings like the ordinary shares.

The Treasury and NSSF have been paid Sh770 million in the past two years for the preference shares or five times the amount paid to the 45,000 holders of ordinary shares.

READ: Treasury takes half of NBK’s dividend payout

Previous attempts to liquidate the preference shares have been unsuccessful because of strong opposition from NSSF.

Two years ago, a committee formed to craft a privatisation plan for the bank recommended that the 1,135,000,000 preference shares be converted to ordinary ones in a ratio of one-to-one.

The team saw the conversion as a necessary step to clearing the way for the planned sale of the government’s 22 per cent stake to strategic investors.

Equity Bank had expressed interest in acquiring National Bank, attracted by its wide branch network.

“The government should have converted the shares and sold them immediately as an easy exit strategy,” said Mavuno Capital chief executive of Robert Bunyi, adding that exiting the bank now would be a bad decision because it has turned around.

NSSF has been opposed to the share conversion plan because such a move would result in the dilution of its stake in the bank, which currently stands at 48.05 per cent of the issued ordinary shares.

Going by its portion of the preferential shares, a conversion into ordinary shares would have increased the Treasury’s stake in the bank to 71 per cent and diluted NSSF’s to a paltry 25 per cent. NSSF has 21 per cent of the preference shares against the Treasury’s 79 per cent.

National Bank management now hopes that an offer of cash would be attractive enough for the NSSF to accept the deal, clearing one of the many hurdles to its privatisation.

Vimal Parmar, who heads research at Burbidge Capital, however, warned that though settlement of the two major shareholders debt is necessary, it would reduce the amount of funds available for expansion and to meet capital adequacy requirements.

National Bank plans to raise more than Sh10 billion through the rights issue – its first since it listed at the Nairobi bourse in 1994.

The bank is hoping to return to the league of top-tier lenders, a position it lost due to gross mismanagement of yester years.

Execution of the turnaround plan has recently seen the bank send home 190 employees under a voluntary early retirement programme to help cut its huge wage bill. The lender currently spends 44 per cent of its total income on employee emoluments.

Assurance that proceeds of the rights issue will be used to clear their preference shares could motivate the Treasury and NSSF to participate in the cash call. That would amount to contributing money to the fundraising effort so as to be paid more.

Mr Bunyi reckons that shareholder approval of the plan would also support the lender’s share price in the open market.

“The issue of preference shares has been an overhang to the share price,” he said. The bank marked its full turnaround in 2010 with the payment of a dividend after a 12-year lull.

It had been using profits earned in the previous year to wipe out accumulated losses.

Last year it announced a dividend of Sh0.33 per share after recording a 50 per cent growth in profit to Sh1.1 billion. The preference shares will be paid at an interest rate of 1.75 per cent.