- The bank had a core capital of Sh46.3 billion as of June, meaning that it should not have lent more than Sh11.5 billion to one entity.
- The brewer has disclosed the series of loans it has taken from Absa Kenya amounting to Sh18.8 billion in its latest annual report for the year ended June, equivalent to 40.6 percent of its core capital.
- A bank must not lend more than 25 percent of its core capital to one borrower or related borrowers in the rule known as single obligor.
Absa Bank Kenya #ticker:ABSA has lent East African Breweries Limited #ticker:EABL (EABL) a total of Sh18.8 billion, breaching the limits placed on lending to a single borrower.
The bank had a core capital of Sh46.3 billion as of June, meaning that it should not have lent more than Sh11.5 billion to one entity.
The brewer has disclosed the series of loans it has taken from Absa Kenya amounting to Sh18.8 billion in its latest annual report for the year ended June, equivalent to 40.6 percent of its core capital.
A bank must not lend more than 25 percent of its core capital to one borrower or related borrowers in the rule known as single obligor.
The rule is designed to reduce the risk of bank failure due to defaults on a few big loans.
In a statement to the Business Daily, Absa Kenya diverged from the disclosures by EABL and suggested that it only provided part of the loans without specifying its exposure to the brewer.
“There are no regulatory breaches associated with our transactions with any of our clients,” said James Agin, Absa Kenya’s regional director for corporate and investment banking.
“As part of one of the largest pan-African financial institutions, some of our high value transactions are executed by Absa Group, its subsidiaries and affiliates across the continent.”
Absa Group is based in South Africa and owns 68.5 percent of the Kenyan lender.
EABL disclosures say it borrowed the Sh18.8 billion from Absa Kenya and did not mention the South African bank or financiers affiliated to the local lender.
Absa Kenya declined to reveal the share of loans offered to EABL by its affiliates based on its statements.
“We have a prudential responsibility to uphold the confidentiality of our customers and therefore we cannot disclose details about specific client transactions,” the bank said.
Banks are regulated at country level, meaning that Absa Kenya’s capital is required to keep up with its lending activities even if some of the loans it was disbursing represented funds sourced from its affiliates in other markets.
EABL’s newest loan from Absa Kenya is a Sh11 billion facility which took the lender above the regulatory limit.
The brewer had earlier borrowed Sh3 billion and another Sh4.8 billion from the bank.
Institutions breaching the single obligor rules, among others, risk fines from the Central Bank of Kenya (CBK).
“An institution shall not in Kenya grant to any person or permit to be outstanding any advance or credit facility … at any time exceed twenty-five per cent of its core capital,” the Banking Act says.
The law adds that the advances, credit facilities, financial guarantees and other liabilities of the borrower and his associates shall be aggregated for the calculation of their total value and the restriction shall apply in respect of that person and his associates.
The loans Absa Kenya disbursed to EABL include a Sh11 billion unsecured facility which matures in July 2022 and has an interest rate of 10.3 percent.
The lender also gave the brewer Sh4.8 billion without security at an interest rate of eight percent. The loan is repayable in 12 quarterly instalments of Sh400 million beginning July 2022.
Another Sh3 billion loan from the bank maturing in December 2026 was taken at an effective interest rate of eight percent and is secured by the brewer’s parent firm Diageo, which issued a letter of comfort.
Absa Kenya also provided EABL with the Sh6 billion it used to repay its corporate bond of a similar value in June – earlier than the scheduled maturity date of March 2022. It was not clear whether the Sh6 billion loan was still outstanding.
Breach of the single obligor rule is the most widespread compliance failure, according to the CBK’s 2020 bank supervision report.
“Most of the violations were in respect to breach of single obligor limits mainly due to a decline in core capital in some banks that have continued to report losses,” the regulator said in the report.
“Nine banks violated Section 10 (1) of the Banking Act as they exceeded the single obligor limit of 25 percent of core capital,” the CBK said without naming the institutions.
EABL may soon pay some of the Absa Kenya loans from the Sh11 billion it plans to raise by issuing a new corporate bond, reducing the lender’s exposure to the brewer’s business.
“The proceeds of the issue … will be used by EABL to repay certain borrowings taken in the ordinary course of business, to provide working capital for the group across East Africa and to refinance certain short-term borrowings,” the brewer said in a notice yesterday.
“EABL does not anticipate an increase in debt levels as a result of the issuance.”
The brewer’s long-term bank loans stood at Sh38.2 billion in the year ended June, rising from Sh30.9 billion the year before. Its short-term bank loans also increased to Sh6.9 billion from Sh4.1 billion.
The unsecured bond will mature in five years and will have a fixed interest rate of 12.25 percent.
The offer opened yesterday and closes on October 21. Bondholders will invest a minimum of Sh100,000 and additional amounts in multiples of Sh10,000.
Banks and bondholders have been willing to lend to EABL on the strength of its profitability and position as the brewer with the largest market share in the region.
“The group is not in breach of any financial covenants for facilities issued by its bankers as at 30 June 2021. The group had available undrawn facilities of Sh11.4 billion as at 30 June 2021 (2020: Sh4.1 billion),” EABL says in the report.