Old Mutual to sell office tower as shilling fall doubles loan cost

Old Mutual wants to sell its iconic Nairobi tower and convert over Kes8.8 billion of shareholder debt into equity to manage its finance costs, which have shot up by 96 percent due to the depreciation of the Kenyan currency. In a notice to shareholders, Old Mutual states that the shareholder loans, amounting to Kes8.8 billion as of 30 June 2023, which are a combination of foreign currency as well as local currency loans, will now be converted into preference shares.

The South African giant also plans to put its iconic Old Mutual tower, built in 2016 for Kes5 billion, up for sale.

As the Kenyan currency takes a plunge, many corporates are finding themselves facing bloated finance costs. A case in point is Kenya Airways and Kenya Power, demonstrating that huge forex exposures can wipe out improved operating positions.

Old Mutual has made a bold move to restructure its loans early enough, as local and international interest rates soar while the shilling slump picks up pace ahead of Kenya’s Eurobond repayment.

“Finance cost on borrowing were up 96 percent over the same period in 2022 due to increased interest rates as well as forex losses on the portion of debt that is US dollar dominated,” the company said during the release of its results.

“The Libor, on which basis interest is determined for US dollar loans, has moved from 0.59 percent in June 2022 to 5 percent in June 2023, while the Kenyan shilling has depreciated by 14 percent against the US dollar over the same period,” the investment firm said.

Old Mutual Group, which posted Kes588 million in profits in the half-year, up from a loss of Kes1.1 billion in a similar period last year, has been witnessing an improvement in business, raking in an extra Kes2 billion in insurance revenues and a 44 percent jump in investment income.

This positive turnaround, however, came smack in the face of a deteriorating economy that has washed away the value of Kenyan money and has made it expensive to pay back loans.

Global interest rates on dollars, as Central Banks across the globe fight inflation, have also meant that carrying dollar loans has become very expensive.

Read also: Court stops Equity’s rushed takeover of TransCentury

Bad loans on the rise

Companies that took huge loans are finding it hard to repay them under the current local and global high-interest rate regimes. This has seen the amount of bad loans shoot up by nearly 20 percent from Kes515.7 billion in December to Sh586.2 billion in the middle of this year.

The banking sector has reacted by aggressively seeking to recover loans, with Equity Bank making a bold move to try and seize two listed companies, TransCentury and East African Cables, sending shockwaves through the industry.

According to the Business Registration Service data, the number of creditors rushing to court to petition companies for insolvency has risen sharply, even as the number of companies voluntarily seeking bankruptcy protections remains very high.

Creditors petitioning for the courts to declare errant borrowers bankrupt  rose to 10 in the period between June 2023, compared to 5 in the 12 months to June 2022, while debtor’s applications increased to 18 from 11 last year.

This shows that increasingly, other suppliers besides banks are keen on safeguarding their exposures to struggling companies as default risks rise.

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