African Union for Housing Finance Conference: Accessing the capital market


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Accessing the capital market: Housing Finance Kenya’s experience in issuing two bonds – Frank Ireri, CEO.

With more than 46 cities in Africa swelling to populations of a million people or more — and 17 of the world's 100 fastest-growing cities located in Africa — there is an acute need to develop housing solutions for so many urban residents. But raising the capital to meet that growing demand for housing remains a significant challenge. In 2013, the African Union for Housing Finance (AUHF) will host a conference under the theme "Raising Capital for Housing Finance.” The Africa-China Urban Initiative will organize a conference panel discussion on "Understanding (and harnessing) Chinese investment interest." Chinese investment in residential development in Africa is increasingly having an impact and demonstrating a track record of opportunity and experience. Panelists invited include Chinese investors setting out their experiences and expectations for the market and an African corporation that has received Chinese financing.

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African Union for Housing Finance Conference: Accessing the capital market

  1. 1. Housing Finance “A Key Player in the Kenyan Mortgage Sector” Accessing the Capital Markets
  2. 2. Who We Are (Housing Finance) A Mortgage provider with over 48 years of operations within the Kenyan Housing and Banking Sectors Finance gets listed on the NSE, with CDC and GoK retaining a shareholding of 30.4% each and Kenyan individual and institutional investors taking up the balance of 39.2% the Company  The founding investors were the Commonwealth Development Corporation and the Government of Kenya with respective shareholdings of 60% and 40% in the Company 1965 1970  GoK  CDC sells off its stake  Housing Finance successfully  Housing  Incorporation of increases its stake in the company to 50.0%, becoming an equal shareholder with CDC 1992 raises KES2.3bn (USD 27m) by way of a Rights issue  Housing Finance successfully raises KES10bn (USD120m) by way of a MTN (2 tranches) 1999 2008 - 2012  GoK reduces its stake in the company to 7.3%, with Kenyan individuals and institutional investors increasing their stake to 62.3%  Housing Finance also has three subsidiaries that are instrumental to its operations namely Kenya Building Society Limited (KBSL), Housing Finance Insurance Agency and Housing Finance Foundation. 1
  3. 3. Our Core Business Areas  Home Owners Mortgage  CRI Mortgage (Ezesha) Mortgage Financing Solutions  Pension Backed Mortgage (Home Freedom)  Cyclical Mortgage  Employer Sponsored Schemes  Makao building solutions Construction Financing  Vuna Hela (Equity Release)  Construction mortgage  Project Finance to Developers • Current accounts  Savings accounts Retail Banking Solutions  Deposit accounts  Trade finance 2  Forex accounts
  4. 4. How We Have Grown…. Mortgage Book (KES Bn) 35.0 (USD360m) 30.3 30.0 25.2 25.0 19.9 20.0 15.1 15.0 (USD98) 10.0 8.3 9.0 2006 2007 11.3 5.0 2008 2009 2010 2011 2012 Customers’ Deposit (KES Bn) (USD270m) 23.0 25.0 18.7 20.0 15.9 15.0 12.2 (USD89m) 10.0 7.6 8.8 10.1 5.0 3 2006 2007 2008 2009 2010 2011 2012 From 2006 our Mortgage Book Growth has been out pacing Customers’ Deposits Growth
  5. 5. How We Have Grown….(Cont’) Total Assets (KES Bn) (USD480m 45.0 40.7 40.0 35.0 32.0 29.3 30.0 25.0 18.2 20.0 14.3 15.0 (USD107m) 9.1 10.0 10.4 5.0 2006 2007 2008 2009 2010 2011 2012 PAT (KES Mn) 800.0 682.9 700.0 (USD8.3m) 693.3 2011 2012 600.0 500.0 379.5 400.0 300.0 200.0 100.0 234.2 (USD1.2m) 101.0 136.4 73.5 2006 4 2007 2008 2009 2010 Rapid growth in Total Assets and PAT between 2010 and 2012 YTD was supported by the new funding from the bond issuance
  6. 6. How We have Funded Our Growth in the Past…..(Funding Mix) Housing Finance for a long time had been mostly using customers’ deposit to finance its mortgage book, a situation that resulted in a funding mis-match since mortgage lending is long term with average maturity of 13 years 2008 Funding (KES Bn) 2007 Funding (KES Bn) 2009 Funding (KES Bn) Sho rt Term B ank Lo ans 4% Customers' Deposits 100% Sho rt Term B ank Lo ans 1 2% Custo mers' Depo sits 88% Custo mers' Depo sits 96% 2010 Funding (KES Bn) 2011 YTD Funding (KES Bn) 2012 YTD Funding (KES Bn) Long Term Capital Markets' Funding 29% Short Term Bank Loans 7% 5 Long Term Capital M arkets' Funding 26% Customers' Deposits 64% Short Term Bank Loans 2% Short Term Bank Loans 4% Customers' Deposits 70% Long Term Bank Loans 3% Customers' Deposits 66%
  7. 7. The Various Capital Raising Options that We Considered in 2010 Instrument Considerations  Would have bolstered our core capital Rights Issue Comments  We had done a rights issue in 2008 and needed time to demonstrate to our shareholders value creation hence giving us additional capacity to lend following that rights issue more  We would have benefited from costs savings since its perpetual capital and no interest payments are made  Reduces asset liability mismatch Securitization  Lower capital requirements  We did not want to impact our RoE  Market was still depressed and below the 2007 valuations  Expensive due to management and system costs, legal, underwriting, rating fees and on-going administration.  Transfer risks – it is possible to transfer  Legislation and operational procedures not fully risks from an entity that does not want to developed. bear it. Match Funded Bonds  HF loan portfolio not sufficiently large enough but  Can help unlock liquidity by using incremental mortgage book.  Can help match asset and related liability for the desired duration. 6  Can be structured as a revolving fund definitely a future option.  Market currently not sufficiently deep and efficient enough for match funded bonds.
  8. 8. Merits of Issuing a Medium Term Note…. HF settled for the MTN Issue due to the following advantages over the other options:  No collateral required  No equity dilution…good for existing shareholders  A market for the issue existed & still exists…rates allowing  There was and still is sufficient appetite  Speed and timing of going to market  Flexibility especially related to the repayment structure  The related qualifying expenses are tax deductible
  9. 9. Transaction Highlights Transaction Summary (Tranche I) Situation Overview  Housing Finance had been mostly using customers’ deposits to finance its mortgage book Issuer: Housing Finance Company of Kenya Limited Use of Proceeds: For onward mortgage lending and use in the supply of residential middle and lower income housing units Method of Sale: Privately placed followed by listing at the Nairobi Stock Exchanage Documentation: Domestic Medium Term Note of up to KES 10bn (USD120m) Offered Securities: Senior Notes and unsecured Tranche 1 Amount: Up to KES 5bn (USD60m) Issue Price: Issued on a fully paid basis at par Tenor (Maturity): 7 years to October 2017 Pricing: • Fixed Rate Note: Priced at 8.5%  These deposits were short term hence maturity mis-match with our mortgage book  The short term deposits curtailed our growth potential amid abundant opportunities  A need to grow our mortgage book as well as Shareholders’ interests  We needed a long term but flexible funding The Instrument We Used  A 7 year Fixed Rate Note and Collared Floating Rate Note • Floating Rate Note: Priced off a 182 day T-bill plus a margin of 3.0% with a floor rate of 5.0% and a cap rate of 9.5%  The structure was based on the prevailing interest rate environment Marketing and Execution  The transaction was marketed within a period of two weeks to local Interest/ Coupon (dates): April/October and will be paid semi-annually in arrears Issue date: 11 October 2010 Redemption: Bullet Status: The Notes are Senior Notes that constitute unsubordinated and unsecured obligations of Issuer and will rank pari passu with themselves and other unsubordinated and unsecured obligations of the Issuer fund managers, banks, insurance companies and a section of high net worth clients  The first tranche of KES 5bn (USD60m) was oversubscribed by 41.0% to KES 7.03 bn (USD85m) with majority of investors preferring fixed rate note  Capital Markets Authority (CMA) gave us approval to pick the extra KES 2.03bn (USD25m). 7
  10. 10. Way Forward… ● Need of creating long term instruments to fund housing projects e.g. Housing Bonds ● More legislation on mortgage sector to enhance more funding structures such as Covered Bonds ● Need of Mortgage players to leverage on their balance sheets with instruments like Mortgage Backed Securities and other forms of Securitizations ● Creation of REIT Funds (Gazetted July 2013) 9
  11. 11. THANK YOU Q & A