The payment of debts, including accrued interest to holders of corporate bonds worth Ksh6.8 billion ($66.14 million) could complicate the planned revival of Chase and Imperial Banks, leaving investors exposed.

This development has hit investor confidence in Kenya’s budding corporate bond market, and potential investors in the two banks may be forced to consider an additional spending on interest payment to bondholders at a combined estimate of Ksh900 million ($8.74 million) per annum.

The dramatic fall of the two medium-sized lenders has left authorities pondering how to compensate the bondholders.

Faced with a growing list of creditors with a charge over the failed banks’ assets, the National Treasury, Central Bank of Kenya, Capital Markets Authority (CMA) and Nairobi Securities Exchange (NSE) are still seeking the most viable option of paying the bondholders.

Last week the NSE suspended the trading of Chase Bank’s Ksh4.8 billion ($46.69 million)   bond after the latter was put under receivership for breach of financial reporting standards. Directors had understated the volume of insider loans in a bid to paint a rosy picture of the bank’s performance.

Imperial Bank was placed under receivership in October 2015 barely three months after the CMA had approved its Ksh2 billion ($19.45 million) bond. Dubai Bank was also placed under receivership and subsequently under liquidation in 2015.

The policy makers say the banks will be revived.

The regulators hope that Chase Bank will eventually find a suitor to take over its business though the revival of Imperial Bank still remains a steep mountain to climb, with shareholders wavering on the injection of fresh capital.

“We are still in discussions with the central bank to see how we can secure positions with bondholders,” said Geoffrey Odundo, chief executive of NSE. “We need to put our heads together and look at the bigger issue. The survival of this bond is very important for the growth of this market.”

Chase Bank borrowed Ksh4.8 billion ($46.69 million) from investors  as part of a seven-year Ksh10 billion ($97.27 million) multicurrency medium-term note programme, giving investors a return of 13.25 per cent (Ksh636 million, $6.18 million)  per annum and  Ksh318 million ($3.09 million)  every six months.

READ: Kenya govt among losers in Chase Bank fall after pumping in $2m

This means that a  new strategic investor would be required to  pay an estimated Ksh4.45 billion ($43.24 million) in interest charges for seven years and a principal amount of ksh4.8 billion ($46.69 million), bringing the total compensation to bondholders to Ksh9.25 billion ($89.9 million) in 2022.

Imperial bank borrowed Ksh2 billion ($19.43 million) from the bond market before it was put under receivership two months later, in October 2015.

The bond carried a coupon rate of 15 per cent, implying that the bondholders claim about Ksh300 million ($2.91 million) in returns per annum, translating to Ksh1.57 billion ($15.25 million) in 5.25 years.

The total interest accrued plus principal by 2021 would be Ksh3.57 billion ($34.69 million). These investors are entitled to interest payments on the bond   after every six months. The initial interest payment of about Ksh150 million ($1.45 million) was due on March 28.

“Compensation of bondholders is a process we are currently working with Kenya Deposit Insurance Corporation (KDIC) and Central Bank; I can’t give you details,” said Paul Muthaura, acting chief executive CMA.

It, however, remains unclear whether KDIC will play a role in compensating bondholders given that its key mandate is to  protect small   depositors against loss of their deposits in case of a bank failure.

The corporation provides   payments of insured deposits of up to Ksh 100,000 ($972.75).

Kenya’s corporate bond market controls a paltry 1.01 per cent of the total bond turnover compared to Treasury bonds 98.99 per cent, according to data from CMA.

In 2015, corporate bond turnover stood at Ksh3.08 billion ($29.96 million) compared with Treasury bonds turnover of Ksh302.02 billion ($2.93 billion).