An increasing number of companies operating in the East African region are turning to rights issues to grow their balance sheets, due to the high costs of borrowing.

Last week, Uganda’s National Insurance Corporation (NIC) became the latest listed firm to announce it was going to sell shares to current investors at a price it is yet to disclose.

NIC created 1.4 billion shares increasing its authorised share capital to Ush10 billion ($3.875 million) from Ush3 billion ($1.162 million) during its annual general meeting in September last year. The firm is banking on the rights issue to grow its capital. A rights issue is a way of raising new cash by offering shareholders stocks in proportion to their current holdings.

Crested Stocks & Securities from Uganda will be the lead transaction advisor and sponsoring broker while Standard Investment Bank from Kenya will assist as transaction advisor.

NIC made the announcement on the same day that Kenya’s Family Bank launched a rights issue seeking Ksh1.25 billion ($14.7 million) through the sale of 40.52 million shares. The rights issue closes on December 7.

Regional retail chain Uchumi Supermarkets has also announced a rights issue through which it plans to grow its capital from Ksh2 ($23.8 million) to Ksh3 billion ($35.7 million). The regional chain is also creating an additional 100 million ordinary shares and will be cross-listing in Kampala, Rwanda and Dar es Salaam.

Other firms in Nairobi that have sold rights issues this year are Kenya Airways, Diamond Trust Bank, NIC Bank and CfC Stanbic.

The four listed firms have issued a combined 1.27 billion shares and raised Ksh28.6 billion ($336.54 million).

The Nairobi Securities Exchange is now expecting the results of Standard Chartered Bank, which was selling 22.08 million shares and hoping to raise Ksh2.36 billion ($27.83 million).

These amounts do not include what has been raised through bond issues like Housing Finance which sold debt worth Ksh2.9 billion ($34.11 million) and Centum which raised Ksh3.2 billion ($37.64 million).

Past rights issues

Last year, the Kenyan market did not raise any amount through rights issues.

In 2010, KCB Group, TPS East Africa, Standard Chartered and Kenya Power raised a combined Ksh27.12 billion ($319.13 million) and in 2008, KCB and DTB raised a combined Ksh7.19 billion ($84.62 million).

In Tanzania, DCB Bank is in the middle of a rights issue through which it hopes to raise Tsh14.64 billion ($93,186) to finance its expansion plans including converting into a fully-fledged commercial bank from a community bank .

Robert Baldwin, chief executive officer of Crested Stocks & Securities said most companies are raising funds because they want a stronger balance sheet.

“Most current deals were planned in the past two years and it is expected the trend will continue into the coming year,” said Mr Baldwin.

As Central Bank Rates continue to drop across the region, the cost of borrowing will likewise drop, meaning the amount of money circulating in the economies will rise.

Part of this money is likely to find a home on the stockmarket where trading in stocks rises when interest rates fall as investors shun bonds. This creates a favourable environment that companies can exploit to raise funds for expansion.

The Bank of Uganda cut the CBR by 10.5 percentage points this year to 12.5 percentage points, down from a peak of 23 percentage points in January.

The Central Bank of Kenya has also cut its benchmark rate by seven percentage points to 11 percentage points.

“In Tanzania, the central bank has been mopping up liquidity in order to curb inflation and stabilise local currencies,” said Moremi Marwa, the chief executive of Tanzania Securities. “The liquidity situation has improved and more people are investing in fixed income instruments and equities,” he said.