HF seeks Sh1bn bailout capital from new investors

Mortgage financier HF Group #ticker:HF is seeking to raise Sh1 billion from unnamed investors to boost its capital and liquidity position.

The loss-making firm has in recent years suffered from the slowdown in the real estate market and interest rate controls that were repealed in November last year.

HF, whose top shareholder is insurer Britam Holdings with a 48.22 percent stake, says in its latest annual report that it is negotiating with investors for additional tier two capital.

The potential investors have been conducting due diligence on the lender.

“The group is expecting a Sh1 billion tier two capital injection in 2020 which will take the ratio back to compliance,” the company says in the report.

HF’s tier two capital, also called subordinate capital, had by December 2019 dropped 18.4 percent to Sh558.49 million, short of the minimum capital requirements.

HF’s total capital to total risk weighted assets ratio in March stood at 13.68 percent against the set minimum of 14.5 percent which is enforced by the Central Bank of Kenya.

The ratio is crucial in assessing an institution’s ability to absorb losses before becoming insolvent and putting depositors’ funds at risk.

HF’s managing director, Robert Kibaara, told the Business Daily on the phone that there had been “good progress” on the capital-raising efforts, adding that a formal announcement was expected in days.

“There is very good progress but I have no liberty to disclose details now given we are a listed company. We will make a formal announcement soon. This will improve the capital ratio as well as the liquidity ratio,” said Mr Kibaara.

The identity of the prospective investors was not disclosed but the proposed deal is a signal that Britam is not willing to invest additional capital in HF.

The insurer invested more than Sh5 billion to acquire the HF stake but the mortgage financier’s subsequent losses saw it write off a total of Sh2.8 billion of the investment in the two years to December 2018.

Britam built its HF stake through several transactions, including the buyout of Equity Group’s 24.7 percent ownership in 2014 for Sh2.8 billion.

HF also has major debt investors, including the European Investment Bank, the East African Development Bank and Shelter Afrique.

Gerald Muriuki, an investment analyst at Genghis Capital, said HF was likely to turn to development banks for a long-term loan.

“Banks prefer a mix of debt and equity in their tier two capital and HF may go for a long-term loan from development banks,” Mr Muriuki said.

HF closed the first quarter of the year with a net loss of Sh0.63 million in contrast with the Sh158.29 million loss posted in a similar quarter last year. It last made a profit in 2017.

The lender has disclosed that its liquidity ratio had also at some point last year fell below the required minimum of 20 percent before improving marginally to 21.3 percent at the end of March 2020.

The weak capital and liquidity position saw the bank breach the terms attached to Sh5.8 billion worth of loans from various financiers. HF is negotiating for waivers of the covenants.

“As per the contractual agreements, the breaches do not result in the borrowings becoming repayable on demand,” states the bank.

HF is in the middle of transforming from a property developer and mortgage financier to a mainstream bank, partly in response to the challenges in the housing and commercial real estate business.

The soft property business, which has seen a decline in rental fees and a spike in auctions, is set to suffer more from the Covid-19 pandemic.

HF’s pivot to mainstream banking, however, requires substantial capital in an industry that favours big players in retail and SME banking.