HBFC barred from risky borrowing
HBFC wanted to take highly expensive loans for the development of land blocks owned by the company into residential and commercial properties. PHOTO: file
The Privatisation Commission (PC) board on Tuesday barred the management of House Building Finance Company (HBFC) from taking expensive but risky commercial loans for their re-lending and investment in government debt, and picked two parties for privatisation of the entity.
The PC board met under the chairmanship of Abid Hussain Bhayo, PC Chairman, and considered the privatisation of HBFC, an entity that had been on the active privatisation list for the past five years with little progress.
At a time when the PC was putting in all its energies to sell the company, the HBFC management tried to borrow more to finance new mortgage loans, finance investment in government securities and finance the development of land blocks on its balance sheet.
The expensive loans at around 23% interest rate would have eroded the chances of privatising the entity.
“The board, while appreciating the proposal, suggested that the HBFC privatisation transaction was at an advanced stage and that any initiative having financial implications may be avoided at this stage,” said a statement issued by the privatisation ministry after the board meeting.
HBFC CEO apprised the PC board of the performance of the corporation, highlighted the future action plan, elaborated the envisioned initiatives and sought approval, as required under the PC Ordinance 2000, for those initiatives, it added.
The board was of the view that “the potential buyer may be given the choice to introduce reforms as per its business plan and requirements”.
The managements of state-owned enterprises are one of the hurdles in the way of privatisation of loss-making entities.
This week, the federal cabinet finally decided to close SME Bank after all attempts to privatise it failed. It agreed to pay back Rs5.5 billion to the bank’s depositors and also cleared a plan for laying off employees in the second phase.
The HBFC management told the board that it had planned to expand advances to Rs10 billion, by taking expensive loans from the market. The board did not endorse the plan.
The company sought permission for bilateral credit arrangements with the commercial and specialised institutions. HBFC has borrowed money since 2019 from Pakistan Mortgage Refinance Company (PMRC), which is now interested in buying HBFC.
The HBFC management informed the government that it wanted to continue to make investment in technology platforms and related initiatives to enable the company to automate and digitise its processes.
In the middle of privatisation process, HBFC also wanted to hire resources to ensure the induction of new skillsets and the implementation of new and strategic investments.
It wanted to take highly expensive loans for the development of land blocks owned by the company into residential and commercial properties.
The privatisation ministry was of the view that the transaction had reached a sensitive stage now, where potential investors were being considered for pre-qualification prior to the due diligence process.
The company’s proposed actions might have an impact on the balance sheet as well as the enterprise valuation post-due diligence, which might as well affect investor confidence at this critical juncture, it said.
Pre-qualified bidders
The Cabinet Committee on Privatisation (CCOP) conditionally approved the pre-qualification of PMRC and Pakistan Housing Finance Company (PHFC) for participation in the sale of HBFC.
“The board agreed to the recommendation to pre-qualify both the firms to take the process to due diligence stage and meanwhile any further clarification, if required, be sought from the bidders,” said the privatisation ministry.
HBFC has been part of the active privatisation list since 2018. In January 2020, a financial advisory consortium (FAC) comprising MCB Bank, Elixir Securities and EY Ford Rhodes was appointed.
The FAC presented the transaction structure which was approved in December 2020. Afterwards, post-completion of pre-requisites, Expressions of Interest and Statements of Qualification (SOQs) were advertised with the deadline of May 2022.
Four parties submitted the SOQs. However, they either did not provide the necessary information or were not pre-qualified due to technical reasons.
Subsequent to the second marketing exercise, only two parties submitted the SOQs, which were reviewed by the FAC.
The FAC recommended that post-review of the SOQs, after all requirements are fulfilled, PMRC may be pre-qualified and be taken to the next stage.
In the case of PHFC, there appears to be some material gaps with regard to its organisational and management capabilities, consortium agreement signed by Zulfiqar Alain, and not by the authorised signatories and sponsors of PHFC, and the low net worth of PHFC, being the consortium lead.
The board decided that PHFC’s pre-qualification was linked with the completion of information.
Pakistan has assured the International Monetary Fund about early privatisation of HBFC but the matter has taken a longer time, like all other privatisation transactions.
Published in The Express Tribune, March 22nd, 2023.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the st conversation.