Tuesday, May 20, 2008

Investors face harsh reality of securing hefty IPO loans

From Bdafrica.com

- Written by Washington Gikunju

Investors applied for bank loans to fund the Safaricom IPO
May 20, 2008: Investors who borrowed bank loans to buy shares during the Safaricom Initial Public Offering (IPO) are considering having to re-pay loans on much lower share allocations than they had applied for, following news that the offer has been highly oversubscribed.

The Safaricom IPO, already billed as the third largest ever in Africa, surpassed only by the Maroc Telecom and Telecom Egypt, offers generated huge interest from investors and banks, who literally set camp on the streets as they competed for investors who needed financing to buy the shares.

Some banks have fixed the re-payment period at six months, meaning that investors will pay interest on the loan for six months, even if they repay the principal in full on the first day the Safaricom shares hit the market.

Despite the relatively huge outlay of Sh50 billion that Treasury targeted to raise from the IPO, preliminary figures from the transaction arrangers show that investors put in over Sh191 million, surpassing treasury’s budget by nearly four times.

Retail investors are known to have gone for bank loans to finance their applications for the shares in droves, pushing amounts received from the domestic investors’ application pool to Sh115 billion, equivalent to an oversubscription rate of 254 per cent.

Some investors applied specifically for Safaricom IPO loans, meaning that any refunds due to them following the oversubscription will go towards offsetting their loans, but others borrowed unspecified personal loans and used the amounts to buy the IPO shares.

Both groups will however be expected to service the loans in full despite projected allocation levels being suspected to be as low as 25 per cent of investor applications.

Some market commentators have said that the huge refunds portend a good secondary market for Safaricom shares which could favour the borrowers, but others say that they will be burdened with having to pay for interest and other charges on loans that did not generate any incomes for them.

It is suspected that investors borrowed billions of shillings from banks to finance their applications, though exact industry figures of the IPO loans are not in public domain.

Equity Bank was one of the leading lenders suspected to have disbursed huge sums, including a publicly acknowledged lumpsum of Sh1.5 billion extended to Safaricom employees for the IPO.

Other banks that were openly offering up to 100 per cent financing for the IPO include Diamond Trust, Transnational, KCB, I&M, NIC, National, CFC and Stanbic.

The IPO loans were given at an interest rate of 15 per cent, plus commitment charges which ranged between one and three per cent. The Safaricom shares were seen to be particularly attractive and a relatively safe bet for both investors and lenders, given Safaricom’s position as the most profitable company in the region and its dominance in the local mobile telephony market.

The transaction advisors now say that retail investors are only likely to get allocations of between 25 to 30 per cent of their share applications, even after factoring in a claw back of 1.5 billion shares from the foreign investors’ application pool to bring total shares available to domestic applicants to eight billion.

This means that applicants will have to pay up to 75 per cent for loans on which they did not receive any share allocations.

The Kenya Bankers Association (KBA) chief executive, John Wanyela, says that re-payment of the loans should not be a problem, especially for those who applied specifically for IPO financing.

Shares as security

This, he says, is because all refunds will go towards knocking off the loans in proportion to allocations, leaving the banks with shares allocated as their security while the borrowers will pay interest on the loans only for the duration held.

“The only borrowers who have to pay for full loans are those who borrowed without specifying that the loans were meant to finance the IPO, otherwise banks had structured their loans in such a way that any refunds would offset the principal amount,” says Mr Wanyela.

Some analysts have also argued that banks may face a backlash from borrowers who will have to grapple with repayments long after the allocation of Safaricom shares on June 9, and especially so if the loans taken were long term.

I&M Bank chief executive Arun Mathur says that most of the IPO loans were short term, adding that investors stand to benefit if the share price appreciates significantly in the secondary market.

Afrika Investment Bank chief executive, Peterson Mwangi, says that taking a bank loan to finance purchase of shares during IPOs is a risk that is only worth taking if there is a good chance that the share price is likely to rise when it starts trading.

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