Friday, July 17, 2015

The Greece Crisis and Monetary Unions

There has been a lot written and debated but I wanted to highlight some of the predictions about the European Monetary Union.

Source: Bloomberg

Arnulf Baring
The German political scientist offered dire predictions in his 1997 book Scheitert Deutschland? Here's an English translation:
They will say that we are subsidizing scroungers, lounging in cafés on the Mediterranean beaches. Monetary union, in the end, will result in a gigantic blackmailing operation. When we Germans demand monetary discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk once again becoming the most hated in Europe. 

And that is EXACTLY what has happened. The Germans are being blamed for demanding monetary (& fiscal) discipline on countries that are Mediterranean (Portugal, Spain, Italy and Greece except Ireland) with the reputation of their citizens as being lazy, unmotivated and/or early pensioners hanging around in cafes.

Milton Friedman
In a keynote address with the Bank of Canada in 2000, the Nobel laureate offered some cautious words when asked about the future of the euro. 
I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them.
Was he right or was he right?
Margaret Thatcher
According to her autobiography, back in 1990 the former Prime Minister of the United Kingdom warned that the single currency could not accommodate stronger and weaker economies. Here she is describing arguments with John Major about the topic:
We had arguments which might persuade both the Germans — who would be worried about the weakening of anti-inflation policies — and the poorer countries — who must be told that they would not be bailed out of the consequences of a single currency, which would therefore devastate their inefficient economies.
The Brits need to build a statue to her and place it next to Nelson's Column in Trafalgar Square!

Sunday, April 05, 2015

Largest Britam EA shareholder's associate (Bramer Bank) in huge trouble with Mauritian Central Bank

A major shareholder [British-American (Kenya) Holdings] in Britam EA associated with Dawood Rawat, a director of Britam EA, is in big trouble. 3 directors in Britam EA are associated with Bramer Bank of Mauritius.

Britam Kenya Holdings, a subsidiary of Britam Mauritius, is a major shareholder in Britam EA (listed on the NSE). So Britam EA is not directly affected by the mess but there may be counter-party exposure.

Bremer Bank, associated with Britam Mauritius through the Rawat Family, has been accused of running a Ponzi scheme by the Mauritius Central Bank. 

Mr. Moussa Rawat is also Chairman of Bramer Corporation Limited, the holding company of the financial services cluster of the British American Investment Group in Mauritius that consists of British American Investments Company (Mauritius) Insurance, Bramer Banking Corporation (Banking & Leasing) listed on the Stock Exchange of Mauritius and Bramer Asset Management Ltd (Asset & Wealth Management).

Mr Ghulati is the Group President and Chief Executive Officer of Bramer Corporation Limited and provides leadership to the Presidents and Chief Executives of BAI Co (Mtius) Ltd, Bramer Banking Corporation Ltd, Bramer Asset Management Ltd, Bramer Capital Brokers Ltd and Bramer Global Services Ltd. He is also the Vice Chairman of Bramer Banking Corporation Ltd and a director on over 25 subsidiary Boards of the British American Group.

Mr. Dawood Rawat is currently the chairman of Seaton Investment Ltd, Mauritius and he has extensive experience in the Financial Services sector. He is now Chairman Emeritus of all The Companies of the Group. He has been the Chairman of the Board of British American Investment Co. Mauritius Ltd. since 2002. He has served as the Chairman of the Boards of Iframac Limited and Courts (Mauritius) Ltd. He has been the Chairman of GlobalCapital p.l.c., since October 4, 2012. He served as the Chairman of the Board of Mauritius Leasing Co. since 2005. He has been a Non-Executive Director of The Mauritius Leasing Company Limited since 1997. Mr. Rawat has been a Non-Executive Director of Global Capital plc. (alternatively, Global Financial Services Group Plc and Bahamas and Malta) since March 2003 and Bramer Banking Corporation Ltd. since April 01, 2008.

Top Ten Shareholders 2013 - Annual Report
British-American (Kenya) Holdings Limited
2 Equity Holdings Limited 405,000,000 21.41%
Jimnah M. Mbaru
4 Benson I. Wairegi 100,298,400 5.30%
Kenya Commercial Bank Nominees A/C 915F
6 Peter K. Munga 75,000,000 3.97%
James N. Mwangi
8 Co-op Bank Custody A/C 4012 60,000,000 3.17%
Filimbi Limited
10 Standard Chartered Nominee Account 17,165,300 0.91%
Grand Totals 1,891,451,850 100.00%

Bottomline: Britam EA may not be affected but for the association with Dawood Rawat (& his directors) who is connected with Bramer Bank. The Mauritian Government may take over the ownership of the shares that Britam (Kenya) Holdings has in Britam EA. If these shares are sold then Britam EA may have a new 'Strategic Partner' or a wider base of EAC shareholders.

Britam EA can benefit from this boondoggle by taking over business units owned/run by Britam (Mauritius).

Tuesday, January 13, 2015

KQ - Losses, losses and more losses

Ahhh, my bête noire never fails to fail...
*I support KQ as an airline but the poor decisions made by (some members of) the Board and Management have financially devastated KQ*

And Godfrey Mwampembwa aka Gado [on Twitter as @iGaddo] says what I could not in 1,000 words...


Strategic Investors - A brief local perspective

The term Strategic Investor is often bandied around and it seems many firms are looking for one.

What is a Strategic Investor?
Why have a Strategic Investor?
What the pros and cons?

I do not want to post a long post so I will try to be brief.

A Strategic Investor is one who:

  • Invests for the "Long Haul" [not a Speculator nor a Financial Investor] but can sell out if need be.
  • Provides additional capabilities, knowledge or access to superior technology.
  • Often has an additional (in-depth) relationship with the Investee.
Many firms have reached a stage in their lives when they need to collaborate with others to expand or improve their presence and products. It is not easy to go it alone in an increasingly complex world. It is not always about the money but often the need to access processes and technology which is owned by other firms.

  • The Investee does not have to recreate the wheel. Sameer Africa (previously Firestone Tyres EA) had Firestone/Bridgestone as the SI to run the firm, provide technical support and access to suppliers. Firestone/Bridgestone have divested from Sameer Africa but helped Sameer Africa create its own brand/designs under Yana. Sameer is looking for another SI preferably an Asian partner whose technology, designs and processes are more aligned to producing for a competitive and price conscious developing/emerging economy.
  • Cheaper financing. Unfortunately, due to structural reasons, the financing costs in Kenya are very high. Borrowing in KES currently ranges from 12-18% p.a. for many firms. Large foreign firms can borrow in USD at 1-4% p.a. which helps them finance equipment at reasonable rates for its Investees. Seaboard Corporation (USA) owns 35% of Unga Holdings and provides financing for both grain and equipment. In addition, it help Unga access the grain markets at a lower cost using its vast trading network.
  • R&D. Access to R&D is a vital competitive advantage. Many Kenyan firms cannot afford the R&D due to the high costs of funding labs or access to world-class researchers. Safaricom leverages the capabilities of Vodacom to introduce new products e.g. the phenomenally successful M-Pesa is licensed from Vodacom. Whereas some of the infrastructure supporting M-Pesa is being moved to Kenya, it was owned, set-up and hosted abroad for years by Vodacom for Safaricom.
  • Loss of 'control' to an SI versus charting out a path. The SI may be conservative or their thought processes are not ideal or well-suited for the local markets. Equity Bank outgrew both Barclays (it was Kenya's largest bank by a HUGE margin) and StanChart (once a strong #2) in Kenya after the SI of both banks throttled back on expanding in rural areas as well as jettisoning 'low-value' customers. Equity Bank picked up branches and customers to become a behemoth.
  • Loss of value for existing shareholders since the gains/profits are shared with the SI. I do not see this as a major issue since the SI may help make the pie much larger so a smaller share of a much larger pie is a larger piece for everyone.
A partial list of firms with Strategic Investors: [Data may need verification]
  • Scangroup. 51% WPP. Bharat Thakrar who once owned 80% is quite the visionary chap. Hats off.
  • Equity Bank. 25% Helios Partners. HP seems more a financial investor than what a SI is but HP provided EB with significant amounts of capital at the right time. James Mwangi is quite open to innovative ideas about raising capital and Financial Structuring.
  • Unga Holdings [the major subsidiary of Unga Group]. 35% Seaboard Corporation. SC came in when Unga was going through major upheavals.
  • CFC Stanbic. Standard Bank of South Africa.
  • KenGen, KPLC. I am reluctant to call GoK a SI but they do control the firms with 50+% of the ownership.
Not all firms attract a SI but often there are disagreements about value.

KenolKobil, once a fast growing Fuel Marketer badly stumbled due to a significant position in a combination of Fuel and Currency Derivatives had a potential SI (Puma/Trafigura) who backed out after seeing the rot in their books. According to the Board/Management the hunt is still on now that the books have been cleaned up.

National Bank of Kenya with significant GoK (Treasury and NSSF) ownership seems to be looking for a SI.

East African Portland Cement has La Farge (48%) as a SI but the boardroom battles (GoK/NSSF have a significant stake too) have hobbled the firm.

Some firms have ditched a SI e.g. Athi River Mining which almost died in the 1990s had La Farge (Bamburi) as a SI. Bamburi contributed capital and a supply chain which saved ARM. Ultimately, after a clash in strategy with the controlling shareholder (Pradeep Paunrana and family), they bailed out leaving a lot of value on the table. ARM continued to grow by leaps and bounds and may soon be larger than Bamburi in EAC. What a reversal of fortunes!

Thursday, June 26, 2014

Week 26 of 2014 - Bonds, Loans and Banks

The flavor this week, though many months in the making, is mostly about loans and bonds.

Kenya's first ever Eurobond is a resounding success and raised USD 2bn. And at lower than expected rates. The $500mn, 5-year Bonds offered 5.875% and $1.5bn, 10-year rate offered 6.875%. Good show by Kenya's Treasury, its first ever non-politician Cabinet Secretary and the Central Bank of Kenya. It seems the World Bank has a positive outlook for Kenya with the potential production of crude oil by 2017 by Tullow may have helped. Tullow, like Kenya's Eurobond, is listed in Ireland.

I follow @sang252, an analyst on Kenya's Bond Market, and often use his comments and observations for my blogposts. He notes that local KES interest rates should drop slightly as Treasury doesn't need to tap into the local money market. That said, there is a lot of demand for cash from the private sector as it gears up for expansion.

Home Afrika (listed on the Nairobi Securities Exchange) wants to raise debt by issuing a Bond. Click on the link from Business Daily Africa.

This will not be easy since HAFR does not have the track record that Britam or HFCK have. Then add the disappointment with the quality of Financial Reporting and Disclosure by HAFR. HAFR Profit Warning for FY 2013. I doubt they can raise debt at the price & quantity of firms like Britam or HFCK since the risk borne by Bondholders would be much higher.

Athi River Mining (listed on the NSE) is Kenya's fastest growing cement firm but as with growth in capital intensive sectors, it needs cash, cash and more cash. And it plans a KES 25bn bond as part of a plan to raise $300mn [KES 26.2bn]. Read about it here. ARM has also issued Convertible Debt ($50mn) and is confident that the conversion will take place based on the performance of the shares on the NSE.

I expect ARM to manage the process well enough and raise the Funding via multiple Bond Issues or a single Issue but structured into tranches. Kenya is currently over-supplied with cement but ARM has expanded into Tanzania and Rwanda as well as other profitable but associated and opportunistic businesses in South Africa and Mali. If the various projects e.g. LAPSSET, Mombasa Port expansion, new roads, etc can be actualized then I expect a huge jump in consumption.

The ugly truth behind being a guarantor is raising its head in Kenya with the introduction of the Credit Reference Bureau. Have a look at this story of Obadhia Gitonga Micheu who sued Co-op Bank which blacklisted him with the CRB for alleged default on a facility for which he was a guarantor, blocking his access to credit for seven years. The suit raises pertinent questions on the liability of guarantors in the event of default. Kenyans routinely guarantee loans for each other, and sometimes clear arrears or have their assets attached after the borrowers default. OUCH!

It's not just the cement industry but also the food industry expanding at a rapid clip.

Bidco had announced plans to invest $200mn by 2017 then in May 2014 went ahead and announced a $23mn loan by IFC, as well as a syndicated loan of $13.5mn for a $46mn expansion project. The current shareholders of Bidco may raise the $9.5mn using bank or bond financing.

Kevian raised a long term loan of $7.5mn from DEG to expand its production facilities for packaging fruit juices. Recently, it added other products to its range to cater to a growing urban population. I figure it will also need loans for working capital needs and these are likely to be sourced locally.

Now this is an interesting one. One man's soup is another man's poison!
Kenya Commercial Bank (KCB) is in the process of refinancing a KES 3.3bn loan, which the County of Nairobi defaulted on, issued by Equity Bank (EQTY) to the County of Nairobi. Good move by EQTY which can write back the NPL as well as suspended interest for a boost to the 3Q 2014 results!

What a difference leadership can make! Alfred Mutua (@DrAlfredMutua) opened a 33km road built in just 3 months! From Capital FM comes this story. I believe Machakos County may be the first county to raise funds using a Municipal Bond if it continues developing its economy and infrastructure in a sensible manner.

"Machakos Governor Alfred Mutua has officially opened the newly tarmacked Makutano ma Mwala to Kithimani road, the first road to be constructed by a county government.

The 33-kilometer road was built at a cost of Sh650 million over just three months. The road acts a critical linkage cutting across Machakos county, joining Garissa road to the Machakos-Kitui Road."

Makes one wonder what the other 46 governors are doing!

Thursday, September 05, 2013

Precision Air, a Kenya Airways subsidiary, makes a record loss

Wow, things are going bad to worse for KQ as its Tanzanian subsidiary [KQ owns 41.2%] makes a record loss of around TZS 30,400,000,000 [KES 1,650,000,000 or USD 19,000,000] for 2012-13.


Monday, August 19, 2013

Egypt and Kenya - A look back. And forward.

A look back at a blogpost I posted on 11th April 2012 about the downturn in Egypt's manufacturing and how Kenyan firms can take advantage of the situation

Here is an article from Global Post about disinvestment from Egypt or at the minimum a slowdown.

As a member of COMESA, Kenya stands an excellent chance to take back markets lost to Egypt.

Whereas Kenya cannot replicate the beautiful & fascinating pyramids & ancient temples of Egypt, there is a market for tourists who want to enjoy the "Sun & Sand" and not Ancient History in a peaceful environment. It's a pity about JKIA but it should provide the impetus to expand Mombasa's airport to accommodate more flights direct from the tourists' source market.

Back to manufacturing. If Kenya can quickly create an inviting environment for increased manufacturing for export into COMESA, then that will serve Kenyans well for the future not only to counter Egypt but other countries including South Africa, China & India.

Egypt subsidized energy [electricity and fuel] for its export (including COMESA) markets but Kenya's focus on renewable [esp geothermal] energy will be a long-term advantage as Egypt faces hurdles in subsidizing energy for its population & industries. Subsidies will eventually fail and Kenya should stay away from these and concentrate on making the environment attractive for investors & industrial production.

Wednesday, June 26, 2013

Kenya Airways - Citibank projects a massive loss in 2013-14

Citigroup projects the airline to post a net loss of Sh3.1 billion in the current financial year ending March 2014 on higher costs that will wipe out sales.
KQ’s sales are expected to rise 15.3 per cent to Sh114 billion but Citigroup says expenses such as direct costs and net interest payments will rise to Sh118.5 billion, offsetting sales.
The national carrier is projected to return to profitability in the year ending March 2015 with a net profit of Sh618 million, on which Citigroup does not expect it declare dividends.

Wow! The airline business is tough and as Warren Buffett has said... stay far, far away!

I&M Bank lists as I&M Holdings;_ylt=AwrNUPwGLctRPTkADQD_wgt.

I&M Holdings re-listed on 25th June 2013 after a Reverse Merger.

City Trust, a then listed entity on the Nairobi Securities Exchange, acquired I&M Bank Ltd by issuing CTL shares to the shareholders of I&M Bank Limited.

After CTL owned 100% of I&M Bank Ltd, it changed its name to I&M Holdings which encompasses various banking businesses/subsidiaries.

I&M Bank - Kenya (100%)
I&M Bank - Tanzania (55%)
BCR - Rwanda (55%)
Bank One - Mauritius (50% Joint Venture with CIEL)

Congrats the Board of I&M Bank.