After a recent court ruling on Cytonn’s two funds, the CEO, Mr. Edwin Dande, has had occasion to shed light on what happened with the two portfolios that are to be liquidated and the challenges attending to this process.
Cytonn High Yield Solutions (CHYS) and Cytonn Property Notes (CPN) are private funds that the court ordered should be liquidated. According to Mr. Dande, in 2020 there were more investors who wanted to pull assets out than the money coming in through new investments or paid downs from real estate projects. The management stepped in to stop withdrawals partially and prevent the collapse of the fund. But in 2021, Cytonn was forced to hire an administrator to restructure the two funds. The benefit being that a moratorium was issued so that none of the investors can sue the funds during administration.
Some investors got frustrated with the administrator and went to court and requested restructuring under an official receiver but the judge went further and ordered a liquidation, i.e. that the receiver was asked to look for all the assets of CHYS and CPN, liquidate them and pay the investors.
CHYS and CPN own a financial instrument and the assets of the two funds are long note instruments. This means that when the government receiver goes after the assets, he will encounter the Special Purpose Vehicles that Cytonn has to get the money. The problem being that both funds have assets that are commercial instruments. The judge therefore did not ask that the real estate projects be liquidated but rather to liquidate the funds themselves.
Mr. Dande attributed the problem that came up with these funds to the fact that Cytonn took on many projects. He, however, clarified that Cytonn reports to a board of investors of the fund every quarter. He also clarified that taking CPN and CHYS to an administrator was a decision taken by the board of investors.
According to him, real estate and infrastructure projects are ventures that require a lot of money and tend to be long-term. Real estate can be structured in all manner of ways. If it is to be done on a large scale and in a manner that has an impact on the housing deficit, then it requires many different sources of funding as no single source of funding can advance real estate in a significant way.
So how do you structure such an investment in a way that meets both the investments’ need for cash and the investors risk appetite? This is done by bringing in various investors who are willing to take on various charges on the assets. Banks tend to have a first ranking charge on the asset and even hold the title deed to the land. Then there are people willing to accept a second or third ranking charge on the asset. Through such innovative structures, companies are able to carry out long-term projects that require a lot of money.
In the case of the two Cytonn funds, liquidation of the assets is estimated to net in most of the lenders, particularly the one with a second or third ranking charge on the assets, an estimated 14% of their principal investment. If, however, as the administrator recommends, the funds are restructured, then some assets which had not been developed could be sold and the administrator could pay 100% of the principal under the restructured scenarios. Investors would of course be asked to waive the interest for the three years.
This is the best solution according to Mr. Dande who also said that the regulatory environment has not been supportive as there is no other path to funding the housing deficit other than this. The government has no money to fund such projects so the housing deficit which the country faces will require structured finance which will bring in different sources of funding to do real estate development.
According to Mr. Dande, no money has been lost and Cytonn’s management did all that was required of them. He also said the investors have an alternative as these are partnership agreements which allow them to get another fund manager and get another investment fund if they feel the issue is the brand that is administering the fund.