Kenya’s corporate debt market facing brewing investor confidence crisis

Sunday June 25 2023

Nairobi Securities Exchange employee checks the stock trading on board at the NSE head offices. PHOTO | NMG


Kenya’s Capital Markets Authority (CMA) has stepped up surveillance on proceeds of financing raised from the public amid an emerging trend of corporate failures after raising funds from the public through equity and bond issues.

The EastAfrican understands that the latest spate of corporate failures, spreading jitters within the investment fraternity, has also elicited debate on the adequacy of corporate disclosures, the role of transaction advisory firms and the oversight role played by regulators to safeguard investor interest in capital raising initiatives.

“We have issued a circular on this, and we are following up. We are now going even to inspect the projects they are doing to ensure that they are in line with what they (companies) told us (CMA).

Once we get their quarterly returns, we follow the trend for the issue and now we are even going for inspection on the ground to see how the money has been used over time,” Wycliffe Shamiah, CMA’s CEO told The EastAfrican.

Read: CMA wants a return of preferential tax rates

“Once on the ground we inspect the relevant records and also the projects subject to the application of the proceeds from the issuance. We access professional reports from experts like the completion certificates if it involves any construction among other records.”


From hope to receivership

Several firms have been put into receivership just at a point when things appeared to be looking up after raising funds from the public either through rights issues or bond issues.

These include Chase bank, Imperial bank, Nakumatt Holdings, Uchumi supermarkets, ARM, and KaluWorks.

On the other hand, micro lender Real People was not put in receivership but started experiencing financial problems immediately after raising Ksh1.3 billion through a bond issue and failed to repay the bondholders, prompting CMA to investigate how the money was used.

In 2021, CMA fined the micro lender’s four directors a combined Ksh15 million ($107 million) for their roles in diverting proceeds of a Ksh1.3 billion ($9.28 million) bond to South Africa.

The lender raised Ksh1.3 billion ($9.28 million) in 2015 from Kenyan investors to issue loans to local customers but the bulk of the money was wired to its parent company in South Africa to offset an internal loan.

Last week investment firm TransCentury (TCL) and its subsidiary East African Cables (EAC) Plc got entangled into an insolvency battle and obtained court protection against attempts by Equity bank to put them into receivership and administration respectively over unpaid $34 million debt.

Read: EA Cables seeks $9m capital from lenders

The two have since obtained court injunctions restraining Equity bank from executing its receivership plan.

In April, TCL, which owns 68.37 percent of the cable manufacture EAC Plc completed a rights issue which was undersubscribed by 60 percent raising Ksh828.1 million ($5.91 million) against a target of Ksh2 billion ($14.28 million).

It is argued that lack of full corporate disclosures, related party deals and inadequate oversight over initial public offerings, rights issues, Treasury and corporate bond issues could cost investors’ fortunes at the Nairobi Securities Exchange.

This has put CMA on the spot for exposing investors to financial losses by approving equity and bond issues with carrying out sufficient due diligence on the financial and corporate governance of the potential issuers.

For instance, in 2015 CMA issued an approval for investors to buy into the Ksh10 billion ($71.42 million) worth of bonds issued by Chase Bank in June 2015, and Ksh2 billion ($14.28 million) worth of bonds issued by Imperial Bank in August the same year.

Imperial Bank was placed under receivership two months later, and Chase Bank followed 10 months later in April 2016. The lenders were put under receivership due to poor corporate governance and financial challenges.

Hunt for alternatives

The corporate debt market is dealing with a crisis of investor confidence as a result of high default rates by companies and the lack of compensation mechanism for bondholders when the companies they have invested in collapse.

It is estimated that a quarter of firms listed on the NSE are facing financial constraints that may require fresh capital to sustain operations and dividend payment to shareholders.

American investment advisory firm Morgan Stanley Capital International (MSCI) Inc dropped NSE’s listed firms from its latest index review plan over the worsening business environment.

Read: NSE-listed firms dropped from Morgan Capital index

Kenya, which is classified as a frontier market, joins a group of five countries including Nigeria, Egypt, Sri Lanka and Bangladesh whose listed companies have been given a wide berth in MSCI’s latest index review plan over poor investment climate.

NSE-listed firms are bearing the brunt of the economic crisis and investors’ lack of interest as a result of reduced disposable incomes and competing alternative investment options.