Tough choices as banks go slow on asset seizures on defaulted loans

Banks are not specialists in running businesses and whenever they seize a defaulter’s operations, they are usually more interested in selling the company than running it.

But what happens when months go by and lenders are unable to find buyers in a tough economic environment while assets deteriorated?

The answer came from NCBA and Cooperative Banks which have returned steelmaker Kaluworks that they seized last year from billionaire Manu Chandaria over unpaid debt agreeing to give up Sh6.6 billion arrears after they failed to realize their charge.

Another top lender KCB Group has separately also signalled it would go slow on seizure and auction of property of defaulters. Group chief executive Paul Ruso says they’d prefer to work with defaulters to regain their feet. KCB has bad debt by big borrowers such English Point Marina and East African Portland Cement Company.

Write-off

In the Kaluworks case, a consent filed in court shows the NCBA Bank agreed to an 88 per cent write-off while Cooperative Bank will lose 55 per cent of the Sh9.1 billion loans.

NCBA put the company under receivership over non-payment of $40 million (Sh4.3 billion) debt which put Co-op bank loan at Sh4.8 billion.

PVR rao, the administrator told the creditors they would have to either inject Sh750 million to revive the business lease out the company, or sell the assets, but they were unwilling.

Shareholders then offered to bail out the company injecting Sh1.2 billion to pay off the debts and take back ownership.

“In the view of lenders indisposition to provide further funding the administrator was unable to run operations of the company,” Rao said.

Revive business

Mr Chandaria’s Comcraft Group has agreed to inject Sh150 million to revive the business, a further Sh580 million to offset the NCBA loan, and to pay Sh628.4 million to Co-op bank as part of the settlement.

The move by the lenders to take a huge write-off after a year of administration underlines the difficulty of banks in realising defaulted debts under the tough economic environment.

Joseph Gikonyo, the CEO Garam Investments says the Kaluworks transaction is a very unique one where an industrial property is put up for auction in a market where industries are collapsing hence getting someone to run it is quite difficult.

The market could offer to buy the land on which the industry sits on but that would mean writing off the expensive industrial equipment and installation which the bank and owner would never agree to.

Market not conducive

“The market is not conducive right now to get a strategic buyer who would want to run such an industry. The market would be interested in the land for subdividing and selling but the owner would not allow the bank to disregard the value of the expensive specialised equipment on the property,” he said.

Kaluworks was started in November 1966 and later set up an aluminium roll product in Mariakani, Mombasa in 1988.

The products include aluminium coils, sheets, circles, and roofing products with a modern technology plant at Mariakani. It is the only manufacturer of aluminium-coloured and plain roofing sheets in the region.

Among its assets are a foundry, continuous caster, cold rolling mill, and “other finishing equipment.”

Controlling shareholder

Kaluworks is a subsidiary of Clovis Company Limited, a Bermuda-registered investment holding company that is owned by the Comcraft Group, of which Chandaria is the chairman and controlling shareholder.

Mr Chandaria, has previously distanced himself from Kaluworks operations.

Bankers say Kaluworks’ links to Chandaria gave them additional comfort to offer the pots and pans manufacturer multibillion-shilling debt.

Kaluworks Limited’s website shows it was set up in 1929.

Chandaria’s father, an Indian immigrant, laid the earliest foundation of the Comcraft Group in 1915 when he relocated to Nairobi to start a provisions shop on Nairobi’s Biashara street.

As the business grew, his father and extended family members subsequently acquired Kaluworks.

When Chandaria returned to Kenya after studies in the United States, he joined the firm and helped drive its expansion.

Comcraft is now spread in more than 40 countries and US business magazine Forbes in 2011 estimated Comcraft to be worth $2.5 billion (Sh215.6 billion), the last time it valued the business.

Kaluworks sunk into administration after it stretched its cash flows in a regional expansion drive and invested Sh1.8 billion to upgrade its factory in Mariakani.

Colour coating line

The company with a 30 percent market share in East Africa installed a state-of-the-art colour coating line and tension levelling line machinery to expand its product range and volumes.

Mr Rao says this 2012 investment was expected to enhance sales of approximately 5000 tonnes of premium colour roofing in the East Africa region.

However, the company was overwhelmed by mounting costs and cheaper Chinese imports.

Court papers show the company was Sh12.6 billion in debt including bank loans, unsecured commercial paper holders, and shareholder advances against assets of Sh1.3 billion when placed under administration in May 2021.

Mr Gikonyo says whether it is an industrial property like the Kaluworks case or any other property, the biggest challenge in disposing of property today is valuation.

Forced sale value, which is the price such property comes to the market is calculated at 75 percent of the market value.

Land registry details

The Garam Auctioneers boss says valuers usually obtain land registry details to see how many properties have been going in certain areas and then mark down the price by 25 percent.

Mr Gikonyo faults this model given that some property values have been inflated over the years with dirty cash.

He instead suggests that valuers should review the auction bidders' market to gauge what buyers are willing to part with incase of a forced sale.

“Banks are having a big problem at Kitengela where people bought land for about Sh30,000 for an eighth long ago and during the good times, the properties appreciated to between Sh700,000 and a million then stagnated,” Mr Gikonyo says.

“Now since the prices have not moved for a while everyone is disposing and you find the valuer using the prices at the lands registry to give an estimate which is far removed from the reality of the flooded market,” he said.

Ask for a new valuation

He says in such cases when the market is unresponsive banks are allowed to ask for a new valuation from a different valuer to meet bidders expectations.

Lenders can also invoke the 2012 Land value act and buy the land themselves to write them off the default assets and wait for the market to improve.

“We saw a similar case in NBK which financed a lot of people to buy plots in Juja when it was a sisal plantation and when they were defaulting the bank could not sell them. The Bank took over the land and when Juja started rising the bank was able to sell all the property at a good profit,” he said.