Housing Finance A Key Player in the Kenyan Mortgage Sector Accessing the Capital Markets

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Earl Carpenter
5 years ago
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1 Housing Finance A Key Player in the Kenyan Mortgage Sector Accessing the Capital Markets

2 Who We Are (Housing Finance) A Mortgage provider with over 48 years of operations within the Kenyan Housing and Banking Sectors Incorporation of 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 Housing 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% CDC sells off its stake Housing Finance successfully raises KES2.3bn (USD 27m) by way of a Rights issue Housing Finance successfully raises KES10bn (USD120m) by way of a MTN (2 tranches) GoK increases its stake in the company to 50.0%, becoming an equal shareholder with CDC 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 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 How We Have Grown. Mortgage Book (KES Bn) 35,0 (USD360m) 30,3 30,0 25,2 25,0 19,9 20,0 15,0 (USD98) 15,1 11,3 10,0 8,3 9,0 5, Customers Deposit (KES Bn) 25,0 (USD270m) 23,0 From 2006 our Mortgage Book Growth has been out pacing Customers Deposits Growth 20,0 18,7 15,9 15,0 10,0 (USD89m) 7,6 8,8 10,1 12,2 5,

5 How We Have Grown.(Cont ) Total Assets (KES Bn) 45,0 40,0 35,0 30,0 25,0 20,0 15,0 (USD107m) 10,4 9,1 10,0 (USD480m 40,7 32,0 29,3 18,2 14,3 5, PAT (KES Mn) 800,0 (USD8.3m) 700,0 682,9 693,3 600,0 Rapid growth in Total Assets and PAT between 2010 and 2012 YTD was supported by the new funding from the bond issuance 500,0 400,0 379,5 300,0 200,0 100,0 (USD1.2m) 101,0 73,5 136,4 234,

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 2007 Funding (KES Bn) Customers' Deposits 2008 Funding (KES Bn) Short Term Bank Loans 4% 2009 Funding (KES Bn) Short Term Bank Loans 12% 5 100% 2010 Funding (KES Bn) 2011 YTD Funding (KES Bn) Long Term Capital Markets' Funding 29% Short Term Bank Loans 7% Customers' Deposits 64% Long Term Capital M arkets' Funding 26% Short Term Bank Loans 4% Customers' Depo sits 96% Customers' Deposits 70% Short Term Bank Loans 2% Long Term Bank Loans 3% Customers' Deposits 88% 2012 YTD Funding (KES Bn) Customers' Deposits 66%

7 The Various Capital Raising Options that We Considered in 2010 Instrument Considerations Comments We had done a rights issue in 2008 and needed time to Would have bolstered our core capital Rights Issue hence giving us additional capacity to lend demonstrate to our shareholders value creation following that rights issue more We did not want to impact our RoE We would have benefited from costs savings since its perpetual capital and no Market was still depressed and below the 2007 interest payments are made valuations Securitization Match Funded Bonds Reduces asset liability mismatch Lower capital requirements Transfer risks it is possible to transfer risks from an entity that does not want to bear it. Can help unlock liquidity by using incremental mortgage book. Can help match asset and related liability for the desired duration. Expensive due to management and system costs, legal, underwriting, rating fees and on-going administration. Legislation and operational procedures not fully developed. HF loan portfolio not sufficiently large enough but definitely a future option. Market currently not sufficiently deep and efficient enough for match funded bonds. 6 Can be structured as a revolving fund

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 Transaction Highlights 7 Situation Overview Housing Finance had been mostly using customers deposits to finance its mortgage book 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 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 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). Transaction Summary (Tranche I) Issuer: Use of Proceeds: Method of Sale: Documentation: Offered Securities: Tranche 1 Amount: Issue Price: Housing Finance Company of Kenya Limited For onward mortgage lending and use in the supply of residential middle and lower income housing units Privately placed followed by listing at the Nairobi Stock Exchanage Domestic Medium Term Note of up to KES 10bn (USD120m) Senior Notes and unsecured Up to KES 5bn (USD60m) Issued on a fully paid basis at par Tenor (Maturity): 7 years to October 2017 Pricing: Fixed Rate Note: Priced at 8.5% Interest/ Coupon (dates): Issue date: 11 October 2010 Redemption: 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% April/October and will be paid semi-annually in arrears 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

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 THANK YOU Q & A

PART A CONTRACTUAL TERMS

PART A CONTRACTUAL TERMS Pricing Supplement dated 22nd July 2015 Real People Kenya Limited Issue of up to KES 2,500,000,000 Fixed and Floating Interest Rate Notes under the KES 5,000,000,000 Medium Term Note Programme PART A CONTRACTUAL