Kenya is allowing key state-owned corporations to generate their own resources as the country struggles with funding requirements.

The National Treasury has allowed government-owned enterprises to borrow from commercial banks to fund mega infrastructure projects in a development widely expected to reinvigorate activities in the dormant syndicated loan market.

The move is expected to free additional resources for use by the Kenyan government, and bring the corporate governance and financial accountability of state-owned corporations into focus.

“State-owned corporations engaging in economic activities that are commercially viable can go for syndicated loans. We have no objection to that. That is why I increased the core capital for commercial banks so that we can have strong institutions with big balance sheets to finance mega infrastructure projects,” National Treasury Cabinet Secretary Henry Rotich told The EastAfrican.

Mr Rotich said key parastatals in the energy and transport sectors such as Kenya Pipeline Corporation (KPC), Kenya Electricity Generating Company, Kenya Power and Kenya Airports Authority qualify to take up syndicated loans.

“As long as the projects these firms are implementing are generating enough revenue to repay the loans, we have no objection to their proposals,” he said.
Kenya approved the first syndicated loan by a parastatal worth $350 million about two weeks ago.

The loan, in dollars, was acquired by KPC from a group of banks to finance part of the construction of the 450-km Line 1 multi-product fuel pipeline from Mombasa to Nairobi.

The banks were Co-operative Bank of Kenya, CfC Stanbic, Citibank NA, Commercial Bank of Africa, Standard Chartered Bank and Rand Merchant Bank.

“Banks have realised that they need to offer long-term loans to be able to compete effectively with the bond market,” said Amish Gupta, director in-charge of investment banking at Standard Investment Bank.

KPC’s 10-year syndicated loan attracted interest at a rate of 5.38 per cent above the London Interbank Offered Rates — the benchmark rate which some of the world’s leading banks charge each other for short-term loans.

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This compares favourably with the bond market where, for instance, Kenya is looking to raise up to Ksh15 billion ($144.33 million) through a five-year bond priced at 13.19 per cent.

Analysts argued that the move would give public companies greater responsibility on their financial matters.

“I think it is a step in the right direction. The government wants to remove itself from the management of these companies but what we want to see is a number of them being privatised,” said Daniel Kuyoh, a research analyst at Kingdom Securities.

Kenya’s financial market appears to be embracing the growth of syndicated loan financing, where two or more banks jointly agree to give a loan to a borrower.

“As an industry, we require stronger banks that can take bigger opportunities and invest in big projects. If Kenya wants to become the epicentre of investment and trade in the region, we need strong institutions,” said Joshua Oigara, chairman of the Kenya Bankers Association and chief executive of the KCB group.

Kenya issued its debut $2 billion sovereign bond, which was oversubscribed four times, last year.

The bond was issued in two tranches of $500 million due in 2019 and priced at 5.875 per cent and $1.5 billion due in 2024 and priced at 6.875 per cent.

The proceeds of the Eurobond were used to retire a $600 million syndicated loan procured from foreign lenders, and to finance infrastructure projects in road, railway and healthcare.

But the lowering of Kenya’s credit status by London-based global agency Fitch Ratings has dealt a blow to the country’s sovereign credit rating.

Last week, Fitch revised the outlook on Kenya’s long-term foreign and local currency issuer default ratings (IDR) to negative, from stable, and affirmed them at B+ and BB- respectively.

The agency also affirmed the short-term IDR at ‘B’ and country ceiling at BB-. Downgrading Kenya’s credit rating could make it difficult for the country to borrow from international markets.

READ: Fitch downgrades Kenya's credit outlook to negative