Analysis: let PR gymmicks not lie to you, it is very risky to Invest in Cytonn

Cytonn Investment CEO, Edwin H. Dande

Cytonn Investment Management PLC pauses as one of the independent investment management firm in Kenya which is doing well locally and in the region but beyond the what the eyes could see lies a company in deep problems. The recent regulations in real estate industry did not leave Cytonn’s regulated clients in its Money Markets Fund and Pensions products. Cytonn’s Investor Relations page also opted to conceal the 2017 and 2016 financial years’ statements. And to make matters worse, they are yet to publish financial statements for FY 2018.

While there are risks associated with every company but it’s a lot more for Cytonn’s clients. Most of the risk in Cytonn is centered in its real estate development arm. Cytonn’s regulated clients in the Cytonn Money Market Fund and Cytonn Pensions products are equally exposed to loss as Cytonn’s High Yield Solutions LLP clients. On the other hand, it’s evident that StateBank of Mauritius (SBM) Kenya Limited and Taaleri Oyj also face losses to varying extents.

Cytonn recently concealed its historical financial statements signifying there is more than meets the eye in the company. They are not releasing the new ones either.

On Friday last week, Cytonn was found deep into one of the dangerous PR gimmicks simply because they have failed to sell in this hard market, but in order to create an impression that things are going well, they had to resort to such cheap PR where one person would win nearly in every giveaways.

Experts warn that the markets have not adequately understood the risk inherent in investing with Cytonn and urge caution.

“While the Cytonn brand represents a youthful freshness not seen in the staid financial services industry to date; we recommend that market participants remain cautious.” A source told 254news.

For the companies in real estate, it’s no longer rosy for them. CIC is already selling 712 acres of land and exiting the property development business. Britam PLC on the other hand is exiting the real estate development business with plans to auction properties in Upper Hill and beyond to avoid losses across its portfolio.

Also, a second developer in Athi River’s Sunset Boulevard estate is in the red as I&M Bank plans to auction 204 units to recover a KSh 2 Billion debt.

The banking industry reports that Non Performing Loans (NPLs) to real estate developers amount to KSh 43 Billion. Cytonn has bet boldly on real estate. Since the firm offers clients, through Cytonn High Yield Solutions LLP, rates of up to 18% p.a based on loans made to its own projects. After admitting that CHYS rates are based on loan pricing, Cytonn cannot pose as a better real estate risk manager than banking and insurance firms which have more established track records.

The falling Cytonn PLC is now acting as a bank thus offering loans to its own real estate projects at 18% p.a. This in real sense is not logical at all.

CIC Britam PLC and I&M Bank PLC are selling properties where Cytonn also has property- the Nairobi satellite towns in Kiambu and Kajiado counties. According to the notes in Cytonn’s 2017 financial statements- Cytonn has properties in Kiambu County – The Alma, Taraji Heights, RiverRun Estates- where the greatest possibility for loss is. Banks have already moved to auction properties in these areas, fearing that lowering prices would lead to write offs and losses.

Since Cytonn’s residential properties are also located in these areas and have the same fundamentals; then its properties are also going to lose value. Don’t forget that through the corporate guarantee given by Cytonn PLC, these properties underwrite the KSh 10.5 Billion in loans owed to Cytonn High Yield Solutions LLP clients
Since Cytonn owes KSh 40 for every KSh 1 invested, even a small decline in property values (such as the 2.6% decline reported by Hass Consult in Q1 2019); would mean that Cytonn High Yield Solutions LLP clients are already losing money. Because properties sold at auction often sell for lower than their market value, Cytonn High Yield Solutions LLP clients are further exposed to loss. We find that in the present situation, selling Cytonn PLC’s properties would not yield enough money to compensate all CHYS clients. The properties are not as valuable.

Through Cytonn Asset Managers Limited (CAML), Cytonn’s regulated clients- in the Cytonn Money Markets Fund (CMMF) and Cytonn Pensions space- are equally at risk of loss for the following reasons: One, CAML clients are still invested in the same manager (Cytonn PLC) that’s already extremely indebted to CHYS clients.
Two, the strategy and manager are still the same meaning regulation has not changed how risky the funds are. Lastly, Cytonn’s Money Market Fund claims an annual return of 10.7% p.a. Since a portion of its fund is likely invested in treasury bonds and bills earning a maximum rate of 10% p.a; the increase in performance is because a portion of CMMF funds is invested in CHYS at 18% and consequently, Cytonn’s declining property portfolio.

According to the Global Credit Ratings company rating of Cytonn for FY 2018, Investment Managers at Cytonn’s B/BB ratings are judged to have a poor management and control environment Ratings Downgrade just like Chase Bank Kenya Limited went under receivership shortly after GCR issued a corporate downgrade. Cytonn PLC’s current GCR rating implies an 83% chance of bankruptcy in 3-5 years. This is a sign that all pensions clients should avoid the company due to its riskiness.

Cytonn PLC’s stakeholders in Cytonn High Yield Solutions LLP clients bear the greatest risk of loss. First, they are owed sh5.8 Billion as interest. Secondly, the amounts reported on Cytonn’s books don’t tally with the amounts reported in Cytonn PLC’s financials as debts owed to them. Lastly, while CHYS clients have a separate board of directors, they do not have representation in Cytonn PLC’s main board of directors where the decisions to invest their money are made.

SBM Kenya Limited, which has loaned Cytonn Sh650 million against The Alma is equally at risk. The property owned by The Alma is under covenants protecting the interests of TT-Africa, the project’s first lender. SBM is not protected either as some of its units have been pledged as collateral to high value CHYS clients.
In terms of ranking Taaleri takes lead followed by SBM then CHYS clients comes last.

Taaleri Oyj has the least to lose. While their investment in Cytonn has come in the form of property loans at 21% p.a (Cytonn’s 2017 financial statements); their status as the first lender with board representation protects them from loss. It is common for international private equity firms such as Taaleri to insist on restrictive covenants that protect their investment from loss. Such covenants would give them priority in the sale of assets such as Cytonn’s land.
Taaleri also owns the option to purchase 20% of Cytonn which is more ofPR stunt than bonafide transaction as Cytonn’s reports of the transaction provided no consideration. It is uncommon for private equity transactions to close without reporting transaction values. Reporting the transaction value would also value Cytonn PLC, Cytonn Asset Managers Limited (CAML) clients are also at risk of loss. Given last year’s GCR downgrade and the delayed release and concealment of the 2018 and 2017 financial statements respectively; the management culture and risk management processes are still the same. You all remember that Chase Bank Kenya Ltd’s receivership was preceded by a GCR ratings downgrade, withdrawal. While there is certainly more hope for Cytonn at this point, it is unwise to recommend CAML’s services as a pensions manager due to the riskiness of Cytonn PLC, the parent company. Pensions trustees and consultants should evaluate Cytonn PLC’s financial statements which are currently concealed before deciding whether to engage the services of CAML.

The markets in Kenya and the region should adequately understand the risk inherent in investing with Cytonn, there is need for market participants to remain cautious with Cytonn.

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