Investors shunning corporate bonds on the Kenyan market

Friday October 12 2018

Investors have lost confidence in the Kenyan

Investors have lost confidence in the Kenyan corporate bond market due to the high default rates by companies on their loan obligations and failure to compensate bondholders once financially distressed firms go under. 

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Kenyan companies are facing a higher debt repayment burden and reduced earnings after resorting to foreign denominated loans in the wake of a lacklustre performance in the corporate bond market and increased lending in the government through Treasury bills and bonds.

Interest payments on foreign denominated loans are determined by the exchange rate, which can be volatile, and are therefore riskier than domestic loans.

The Capital Markets Authority and the Nairobi Securities Exchange, say that investors have lost confidence in the corporate bond market due to the high default rates by companies on their loan obligations and failure to compensate bondholders once financially distressed firms go under.

A corporate bond is a debt instrument issued by a company seeking a loan to finance its operations. The company is the borrower and investors who buy the bond are the lenders.

The EastAfrican has learnt that international financial institutions are quietly making inroads into the Kenyan debt market after local appetite for corporate bonds declined. The bonds which are currently facing a crisis of investor confidence over compensation issues.

Data from the CMA shows that investors have shifted attention from the corporate bond market to risk-free government bonds, where returns are guaranteed.

Over the April-June period this year, Treasury bonds accounted for 99.88 per cent of the total bond trading on the NSE.

“There is a quiet incursion by international lenders/syndicates who are structuring debt instruments for local companies. The distinction here is that the debt is denominated in dollars,” said Daniel Kuyoh, analyst at Alpha Africa asset managers.

New financiers

The EastAfrican has learnt that foreign firms such as South Africa’s ABSA Group, Rand Merchant Bank (RMB) and other private equity firms are silently moving in to arrange financing for Kenyan companies that are hesitant to issue new bonds after investors burnt their fingers in bonds issued by the collapsed, Chase and Imperial Banks.

In 2017, listed investment firm Centum reached a deal with RMB for a Ksh5 billion ($50 million) financing facility that matures in 2021.

“Our bond market has unfortunately suffered because of poor due diligence and lack of protection for bondholders. This has to be rectified if this market is to grow,” said a source with knowledge of the markets.

Institutional investors such as banks, pension funds, insurance companies, fund managers and high net-worth individuals have been major players in the corporate bond market. However, banks have reduced lending to the private sector and increased their investments in government securities after the latter introduced a controlled interest rate regime in September 2016.

Geoffrey Odundo, NSE’s chief executive, admitted that the demand for corporate bonds has diminished.

“Corporate bond defaults have been on the rise in the past couple of years. The default on corporate bonds issued by Tier II financial institutions in 2015 and 2016 led to a decrease in investor demand for corporate bond issuances,” Mr Odundo told The EastAfrican.

“In addition, the interest rate cap combined with the relatively high Treasury bond rates meant that larger companies preferred to raise capital via banks rather than the bond market, leading to lower supply.”

The CMA says that the corporate bond market has faced significant challenges following the delayed and unresolved issues related to the compensation of bond holders of Chase and Imperial Banks, which were put under receivership due to governance and financial challenges in 2015 (Imperial) and 2016 (Chase).

The bonds were also suspended from trading on the NSE by the market regulator.