Caught in debt trap, Cytonn at mercy of impatient investors

Two years after Cytonn Investments broke ground on its planned Sh5.5 billion Situ Village, a gated community in Karen that targeted clients who would purchase houses on an off-plan arrangement, the company went on an aggressive marketing campaign for the project.

Cytonn’s November 10, 2018 launch was on the backdrop of another project in the same suburb, Amara Ridge. It had expected the new plan to move just as smoothly.

Situ Village was to have modern homes with owners choosing from three different designs, while profits were to be channelled to other projects, one of which was the Cytonn High Yields Fund.

More than 4,000 investors splashed billions into the project, not knowing that their money would become entangled in a complicated web with Situ Village and a Finnish equity fund that’s now seeking repayment of its debts.

Real estate projects that Cytonn relied on to rake in billions have stalled, opening the door for investors and financiers to demand their money without giving the firm a chance to breathe.

Finnish-owned TT Africa had since 2015 been faithful to Cytonn, lending it a total of Sh1.7 billion to ensure that what many consider a real estate pipe dream could become reality for Cytonn.

Most of TT Africa funds were to be channelled into Situ Village. But by 2018, Cytonn was struggling to keep up with loan repayments.

On August 13, 2018, TT Africa gave Cytonn a simple demand – pay up or have the land intended to host Situ Village auctioned. By then, Cytonn’s debt had grown to Sh2.7 billion on account of interest.

Cytonn wriggled out of the difficult, and embarrassing, situation by offering to restructure the debt, using some of the money collected from clients in the high yields fund to repay the loan.

Payment demands

The fund’s clients were in turn promised that their investments would be repaid from the sale of houses in projects such as Situ Village. But a group of Karen residents opposed the construction of Situ Village and filed a petition at the National Environment Tribunal (NET) to stop it.

Under Kenyan law, once a petition is filed at the NET, construction automatically stops until the tribunal determines the case.

The NET eventually ruled in Cytonn’s favour, but the residents filed an appeal at the High Court. The case is still pending determination, and the court has ordered that no construction is done until a final decision is made on whether Situ Village is an environmental risk.

As Cytonn was restructuring the TT Africa debt, the firm received more funding from another Finnish company – Taaleri Afrikka Rahasto II KY.

Taaleri disbursed a Sh2.1 billion loan to Cytonn, which planned to use the funds to construct the Ridge, a mixed use development in Ridgeways along the Northern Bypass.

The Ridge is expected to cost upwards of Sh15 billion, and will consist of apartments, villas, convenience stores and recreational spaces.

Cytonn used money collected from its high yields fund clients to purchase 9.9 acres of land in Ridgeways. The Taaleri funds were to be channelled to construction.

Some of the fund clients had already made payment demands, and Cytonn used part of the loan from Taaleri to settle their dues.

While construction of the Ridge started as planned, progress stalled.

Series of court battles

Cytonn now says in court papers that construction stopped in February last year as a result of the Covid-19 pandemic.

While Cytonn blames its woes on Covid-19 in February, Kenya only implemented partial economic shutdowns a month later. In December last year, Taaleri sued Cytonn and accused the firm of intentionally defaulting on the loan.

Taaleri wants the High Court to allow it to take over ownership of the Ridge, a move that may give the firm a window to auction the property.

The stalled projects have dealt a blow to Cytonn, its investors and financiers. Some have blame it for failing to honour payment obligations as agreed and have launched a series of court battles.

Cytonn is now unable to sell anything at Situ Village and the Ridge owing to the uncertain economic situation that has lowered many middle class Kenyans’ purchasing power, yet the two projects sit between the real estate firm and honouring its financial obligations.

In 2019, TT Africa renewed its bid to auction the Situ Village land, and around the same time Cytonn High Yields Fund clients started demanding payment of their promised returns.

Clients like George Kirigi Thogo had enough of Cytonn’s payment delays and refused to take up an option to be paid in apartments.

Mr Thogo filed an insolvency petition against them last year after the firm showed no signs of paying his Sh14.2 million investment.

Insolvency petition threats

Other investors like Elmelda Mokaya threatened to file more insolvency petitions. The insolvency threats sent warning bells to TT Africa and Taaleri, which last year sued Cytonn to demand their pound of flesh.

The two Finnish firms asked Justice Francis Tuiyott to issue orders compelling Cytonn to deposit their Sh5.7 billion dues in court.

The firms asked the court to alternatively issue freeze orders on all Cytonn properties.

They are the Ridge, Situ Village, Cytonn Towers (Kilimani), Applewood (Karen), RiverRun (Ruiru) and Taraji Heights (Limuru Road).

TT Africa insists that under the debt restructuring agreement it has with Cytonn, the entire loan was meant to have been paid by April 30 last year, but nothing has come forth since.

The Finnish firm adds that Cytonn defaulted on the debt restructuring deal by failing to remit any excess collections from the high yields fund.

But Cytonn has accused TT Africa of acting unfairly by not issuing notices before claiming full payment of the loan, as required by the contract signed by both parties.

Situ Village project

Ms Patricia Wanjama, a Cytonn director, says excess monies paid by the high yields fund clients and which was meant to offset the loan, was not collected.

She argues that only excesses from the high yields fund were to be used to raise Sh300 million that would be paid to TT Africa, but that the threshold was never met.

Ms Wanjama says that TT Africa is a partner on the Situ Village project.

She adds that the security issued to the lender was on ownership of the company incorporated to construct the gated community, Oloolua Estates LLP, and not the actual land.

“TT Africa has not issued several demands either as alleged or at all. There has been no default under the debt restructuring agreement. The sums advanced by TT Africa have been applied to the development in terms of financing agreements and not elsewhere whether as alleged by TT Africa or at all,” Ms Wanjama says in court papers.

In the suit filed by Taaleri, Ms Wanjama argues that the lender has never issued any demands for payment of the loan, meaning that there is no default.

She says Cytonn has been trying to raise more cash from the high yields fund to complete the construction of the Ridge.

“Taaleri is represented on Cytonn Investment Partners Eleven LLP, so they are not merely lenders, they participate in the governance of the entities. As members of Cytonn Investment Partners Eleven LLP’s Board, Taleeri’s two representatives were and are fully aware as to how the funds advanced were deployed, always in full conformity with the terms of the financing agreement towards the development,” says Ms Wanjama.

Both firms say the insolvency proceedings against Cytonn means their debts may not be repaid hence the courts should grant their requests.