Kenya’s National Treasury and the National Social Security Fund are in talks on how to relinquish the preference shares they hold in National Bank and the pave way for a cash call that would dilute the government’s stake in the struggling state-owned lender.
If successful, the move could pave way for a rights issue to recapitalise the bank after the two major shareholders shelved a plan to inject Ksh4.2 billion ($420 million) in the form of a subordinated loan into the business.
The loan proposal has been in the pipeline since 2016.
The EastAfrican has learnt that the government is wary of the proposed debt, which is riskier since it is unsecured and can only be paid after claims of secured creditors have been met in the event of liquidation of the bank.
Sources privy to the ongoing discussions told The EastAfrican that the two shareholders are currently considering the possibility of converting their preferred stocks into ordinary stocks.
“The major shareholders are still negotiating and looking at various options for converting their preference shares to ordinary shares,” the government source said.
Holders of preference shares in a company are given first priority in terms of compensation when a company is liquidated compared with ordinary shareholders.
The bank, which is listed on the Nairobi Securities Exchange, was last week trading at around Ksh5.6 ($0.05) per share, having lost over 35 per cent of shareholder value in the past 12 months.
The National Treasury and NSSF control a 22.5 per cent and 48.1 per cent shareholding in National Bank respectively.
The two anchor shareholders hold a combined 1.12 billion preference shares in the bank.
“If the government agrees to the rights issue, it will cede its majority shareholding through the issue. The small shareholders will take up their rights but the government has not budgeted for that,” said our source.
Efforts to get a comment from the National Treasury Cabinet Secretary Henry Rotich did not bear fruit as our calls went unanswered.
NSSF, the workers’ pension body has been opposed to the proposal to bring a strategic partner on board over fears that vested interests in the bank’s ownership could destroy the state-owned lender.
“We don’t want a strategic partner. My position has been very clear that the bank should do a rights issue and sell more shares to the public through an initial public offering. Kenyans will buy these shares,” Francis Atwoli, the secretary-general of the Central Organisation of Trade Unions, told The EastAfrican in an earlier interview.
“The issue of a strategic partner has a lot of vested interests.”
Initial attempts by National bank to raise Ksh13 billion ($130 million) through a rights issue in 2014 flopped after the proposed transaction was rejected by the government and the Capital Markets Authority.
National Bank’s profit for the nine-months to September 30, fell by 84 per cent to $219,700 owing to reduced lending as loans and advances to customers dropped by 17 per cent (Ksh9.9 billion, $99 million) to Ksh48 billion ($480 million) from Ksh57.88 billion ($578.8 million) in the same period last year.
NBK’s core capital stood at Ksh2.34 billion ($23.4 million) at the end of September 2018, compared with Ksh9 billion ($90 million) at the same point last year.
The government’s bid to merge National Bank with other two struggling state-owned lenders (Consolidated Bank and Development Bank of Kenya) failed to take off after a South African consulting firm, Genetics Analytics, advised against the merger.
The consultant advised that the government relinquish its shareholding in the three banks through cash calls underwritten by strategic investors.
Under this arrangement, the government is not allowed to take up its right leaving the underwriter to take up the controlling shareholding of the banks.
The National Treasury owns 78 per cent stake in Consolidated Bank and 89.3 per cent shareholding in the Development Bank of Kenya.
Plans are already underway to sell Consolidated Bank to a strategic investor through a cash call of more than Ksh2.5 billion ($25 million).
The rights issue will be underwritten by a firm or individuals who will eventually take up the majority shareholding in the bank.
The underwriter will be allowed to buy all the unsold shares and eventually become the strategic investor with a controlling stake.
In 2016, attempts by Consolidated Bank to make a rights issue estimated at Ksh1.8 billion ($18 million) failed after the government also withdrew its commitment to support the cash call.