Credit rating agency Moody’s last week downgraded the long-term issuer rating of Shelter Afrique to Ba3 from Ba1, and noted it could further downgrade the rating if the “Ponzi scheme” allegations against the management are substantiated.
The credit watcher cites structural deterioration in the pan-African finance institution’s credit metric as the key driver of the downgrade driven by rising leverage, deteriorating capital buffers and the weaker liquidity position as the firm has relied heavily on debt to fund the expansion of its balance sheet.
“The Bank has had limited success in securing already committed capital from its shareholders, whilst the expansion of the loan book towards on-lending to financial intermediaries also risks undermining already weak shareholder support.” said Moody’s in a statement.
The agency also noted that the purpose of a further review is to assess the potential credit implications of recent allegations of accounting malpractice made against Shelter Afrique.
According to the Business Daily, Shelter Afrique MD, James Mugerwa, has been dishing out subprime mortgages to unqualified borrowers resulting in a steep rise in the company’s nonperforming loans to at least 59 per cent of Shelter Afrique’s $246.3 million (Sh24.63 billion) loan book . Shelter Afrique was also accused of running a ponzi scheme as it has been borrowing to settle its debt instead of financing new investments.
Shelter Afrique is owned by 44 African member governments (Class A shareholders) together with the African Development Bank and Africa-Reinsurance (Class B shareholders). The Kenyan government controlls a 10.63% stake in the firm.
Moody’s said the review period will also provide an opportunity to assess Shelter Afrique’s funding outlook and shareholder support in light of these allegations made by a former member of Shelter Afrique’s finance team.
“Shelter Afrique’s portfolio is also exposed to an increasingly challenging economic environment, including exposures in Zimbabwe equivalent to 10% of the loan book, and US dollar denominated loans in Nigeria which are at higher risk of impairment following the sharp naira devaluation this year. The Bank’s Kenya portfolio has also faced growing problems over the past year, including marketing risk with projects completed but not selling, and now accounts for more than half of total arrears.” noted Moody’s.
According to Moody’s, if the allegations put forward to the board are substantiated, in particular those concerning the misrepresentation of the quality of the loan book, this would likely have an adverse impact on Shelter Afrique’s ability to access financing and would likely result in downgrading the rating in the B category.
