Investors have demonstrated a strong appetite for Kenya’s corporate bonds, expanding a funding option for firms seeking new cash for their existing and new projects.
I and M Bank Limited is the latest to successfully raise debt from the capital market, receiving bids that were multiple times what it was seeking.
The lender was in the market for Sh10 billion through a 5.5-year bond paying 12.2 percent per annum. The company however took Sh13 billion after receiving bids of Sh23.2 billion, underlining the high appetite for corporate bonds.
The corporate debt market -which was jolted by defaults and scandals engulfing issuers between 2015 and 2018- started picking up from last year.
East African Breweries Plc (EABL) and Safaricom last year raised Sh16.7 billion and Sh19.9 billion respectively, with the transactions encouraging more debt sales.
Kenya Mortgage Refinance Company (KMRC) last week raised Sh3 billion from an 8-year bond paying an interest of 12.2 percent per annum and whose principal will be repaid over time.
KMRC received bids of Sh9.3 billion or more than thrice its target. Investors are rushing for the corporate bonds despite the instruments offering a little premium to government bonds.
The attractiveness of the corporate bonds has been aided by lower interest rates on bank deposits and treasury bills besides a dearth of new auctions of medium-term bonds by the Central Bank of Kenya (CBK) in recent months.
Returns of short-term fixed income instruments are in the single digits while the CBK has preferred to sell longer term bonds maturing in more than 10 years.
These conditions, coupled with the weeding out of shakier firms, have seen a revival in corporate bond sales.
Real People, Chase Bank, Imperial Bank, ARM Cement and Nakumatt Holdings were among the companies that defaulted on more than Sh10 billion worth of corporate bonds and commercial paper between 2015 and 2018.
In the wake of the defaults, most of the remaining corporate bonds were repaid and few borrowers returned to the market for refinancing.
Those that settled their bonds on maturity included HF Group and CIC Insurance Group, leaving a shrunken debt market that started recovering last year.
In the interim, most companies relied heavily on a mix of retained earnings, loans from foreign lenders and equity sales to fund their growth.
Raising debt in the local market at current fixed rates is seen as attractive, with one major advantage being the avoidance of currency risk.
Loans denominated in hard currencies such as the US dollar and euro have floating rates and can saddle borrowers with a heavy repayment burden when the shilling weakens substantially.
I and M Bank, for instance, has said it will use part of the proceeds from its recent bond sale to retire dollar denominated debt to the tune of $50 million (Sh6.5 billion).
‘We’ve got about $50 million of Tier II debt that we have on our books with varying dates of maturity, some being as early as 2027 and we felt that we needed to be able to replace that,” I and M Holdings regional CEO Kihara Maina told the Business Daily.
“This was the right time to go to market because it allows us to front-load our planned local currency debt raise as well as anticipate the maturities that are coming as well as build up a lending pipeline.’