NAIROBI, KENYA: As corporate pinstripe suits gathered in Nairobi last week for the Moody’s Annual East Africa Summit, they were aching to know how easy it is to lose cash in the Kenyan bond market.
Some of the bonds have been subscribed in several markets especially South Africa. However, they were appalled by the number and size of bonds that had lost value in the local market.
Over the last three years, over Sh12 billion in bonds has been lost through two failed banks - Chase and Imperial Bank - as well as Nakumatt which had offered commercial paper in private.
Doubts have also been cast on the creditworthiness of several firms including Athi River Mining and Real People.
“I was sitting at a table and some people were telling me that they had taken the Nakumatt commercial paper at 24 per cent, and I remember telling them that if someone is paying you that much, you probably will not get your money back,” Rich Management CEO Aly Khan-Satchu told the audience at the summit.
Firms are having a hard time convincing shareholders that they inadvertently put money into toxic bonds and that the investments might have to be written off.
In the breakdown of all assets within a fund, investors’ cash is usually split into equities and bonds, which are supposed to be a safer bet.
But they are not foolproof as investors in several firms have come to learn in the recent past.
Investment gurus will come to them with disclosures that they burned their money and some of the most lucrative bonds a few years ago have to be written off.
However, when fund managers, corporate and retail investors lined up to give Imperial bank Sh2 billion in a five-year bond, they expected to reap huge annual returns in the listed market.
Imperial Bank was offering a fixed coupon rate of 15 per cent, higher than Chase Bank (13.1 per cent). Nakumatt was also buying such costly debt in private placement, which allowed investors to lock in sums of money in the retailer.
In all this, the biggest firm to feel the pinch has been CIC Insurance according to the disclosures it made this year. It showed the insurer was exposed to all the three corporate loans.
“As at December 31, 2017, the group held in its books of account a Chase Bank corporate bond amounting to Sh155 million which is 23 per cent of the total corporate bonds portfolio,” CIC said in its annual report.
The insurer also disclosed that it had placed Sh31 million in deposits in Imperial Bank, which was put under receivership.
However, under part payment programmes by the Central Bank of Kenya (CBK), CIC has managed to recoup some money.
It only left Sh28 million deposits in Imperial Bank.
“Imperial Bank was placed under statutory management by the CBK and management assessed the recoverability of the deposits placed with the bank to be doubtful. During the year, Sh3.1 million was received from the bank,” CIC said.
CIC also held Sh71 million in a commercial paper at troubled retailer Nakumatt and holds a further Sh22 million in Real People’s Sh1.6 billion bond, which has been flagged for possible default by South African firm Global Credit Ratings. “There is a strong possibility that the group will breach its capital adequacy ratio debt covenant in the near term, or fail to meet existing debtobligations,” GCR said in December.
Liberty Life Assurance Kenya also had to impair Sh187.5 million of the total Sh250 million invested in the Chase Bank corporate bonds based on director’s assessment of recoverability.
“The group has an investment (corporate bond) in Chase Bank (in receivership) amounting to Sh250 million. The bank is currently under statutory management by the Kenya Deposit Insurance Corporation,” Liberty management said.
“The estimation of recoverability of this amount was significant to our audit. Due to the high level of judgment in assessing the level of impairment of the balances, we considered this to be a key audit matter,” Liberty said in the annual report.
Investment firm Sanlam said they could not provide specific details of each investment since most of their funds are carried in bouquets of investment vehicles.
However, the firm said they had to write off a total of Sh1 billion for defaulted bonds and fixed deposit assets, the largest portion written off last year.
“The impaired amount recognised below relates to non-performing corporate bonds of Sh1.078 billion and Sh46.34 million fixed deposits held as lien with a financial institution for ex-staff loans that are in payment arrears. “The 2016 impairment related to non-performing financial instruments in the period,” Sanlam said in its annual reports.
Nakumatt, which opted for private placement, hit mostly lenders who are owed Sh35 billion - who will either have to book non-performing loans or restructure their facilities, an exercise that could take the next decade before they can recoup their money.
“Signs were there at Nakumatt for a very long time but people chose not to see them. Now a lot of corporates, insurance firms and fund managers are having to write off those debts, deposits and bonds,” Mr Satchu said.
“I remember walking to Nakumatt and seeing one guy with a computer with a spreadsheet. If you compare that with Safaricom where Bob Collymore had undergone a life-threatening procedure and he had a split screen with all the terminal data displayed... you can see the level of differentiation,” he said.
Diamond Trust Bank had given Nakumatt Sh3.6 billion while KCB gave the retailer Sh1.7 billion.
Although Diamond Trust Bank, Nakumatt’s biggest lender, claims it may just come out with secured property, it may be too little to cover their losses.
Moreover, the Sh2.9 billion land does not belong to the retailer but third parties who may tussle out in a long litigious battle.
Other firms only disclose that Chase Bank is still one of their bankers which means that if they hold deposits there, they will be able to access part of the money next month when deposits are taken up by the State Bank of Mauritius.
Unlike other markets, Kenya’s bonds are not protected.
The Investor Compensation Fund only covers investors who suffer pecuniary loss resulting from the failure of a licensed stockbroker or dealer to meet its contractual obligations and for paying beneficiaries from collected unclaimed dividends when they resurface.
The Capital Markets Authority (CMA) says this has affected performance at the market where Government has listed 83 bonds, including two M-Akiba bonds, against the 26 by corporates.
“The study identified the key factors leading to low product uptake as the absence of a clear action plan towards compensation or restitution of bond investors whose funds remained locked in Chase and Imperial Banks, which has dampened the confidence specifically in the corporate bond market,” said CMA Chief Executive Paul Muthaura.
CMA says it has proposed changes in the winding up law to exempt settlement of securities transactions from the provisions of the Insolvency Act.
The regulator said that one of the key principles of Financial Market Infrastructure is the finality of settlement.