Tears as five firms go under with billions of bond investors' money

 “They will walk home with zero. They have lost everything.”

These dreadful words were uttered last month by Peter Kahi, the court-appointed administrator of Nakumatt about investors who had taken up the supermarket’s commercial debt papers or corporate bond.

This was after creditors owed Sh35 billion voted to liquidate the fallen retail giant.

SEE ALSO: Regulator moves to end corporate bond drought

The corporate bond market is littered with sad stories.  

In the last five years, at least five big firms that have floated a corporate bond including at the Nairobi Securities Exchange (NSE) have collapsed providing endless agony to investors and has significantly reduced the appetite for the debt instrument.

Chase Bank, Imperial Bank, ARM and Nakumatt are some of the firms that have sunk and had issued corporate bonds. Others having problems repaying include Consolidated Bank and SME lender Real People.

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Reginald Kadzutu, an investment and economics professional at financial group Zamara attributes the failure of the corporate bond to weak regulation and poor governance in the firms issuing the debt paper.

Kadzutu, is, however, clear that the buck stops with the regulator – the Capital Markets Authority (CMA) and also the Nairobi Securities Exchange (NSE) where some of the bonds are listed.

According to Kadzutu, both the CMA and NSE have played a weak oversight role.

“There’s been little protection for investors even for approved issues, some fell months after being approved by the regulator,” he said.

NSE was in a spot after the Imperial Bank collapsed days before its Sh2 billion bond was to be floated.

On corporate governance, Kadzutu says that it is hard for investors to establish if there’s fraud inside a company issuing a bond.

He says that even an auditor’s word can no longer be trusted.

“Fraud in an organisation is difficult to verify from outside. Gone are the days we used to rely on auditors; some of these collapsed firms were even audited by the “big four” firms,” he said.

He says the market can only get better when investors are given confidence and transparency.

Schools, wealth management funds, insurance agencies and individuals are among 800 commercial debt paper holders who have lost Sh4 billion from fallen retail giant Nakumatt.

A commercial paper refers to an unsecured short-term debt instrument issued by a firm. The money raised is used to finance accounts receivables, inventories and to meet short-term liabilities.

The Nakumatt saga was again replayed recently when asset manager Amana Capital stopped clients from withdrawing funds after it emerged it had invested over Sh200 million in Nakumatt’s commercial paper.

CMA didn’t regulate the Nakumatt commercial paper as it was under private placement meaning investors were unsecured and hence can’t claim anything.

Kadzutu says that these need to change and CMA should regulate such commercial papers to cushion investors as its “public money.”

“It’s public money and CMA should protect investor interest,” he said.

During the recent launch of real estate developer, Acorn’s green bond, Nairobi Securities Exchange (NSE) boss Geoffery Oundo said he was optimistic of the revived confidence of the corporate bond saying that “drought” was a harsh term.

He said that markets all over face a “blip” but time would prove a healer. “There’s no drought. I’m very optimistic as time goes on the bond market has matured and we’re going to go back to that level. There’s always a blip in the market, Kenya is not unique,” Oundo said.

There are fears of a complete dry out as most listed bonds mature by 2022.

Foreign investors are also spectacularly shunning the corporate bond sector.

The CMA soundness report for quarter 4, 2019 shows that local investors in the corporate bond led the segment at 98.74 per cent of amounts outstanding while foreign bond investors held only 1.15 per cent of the total corporate bond holdings.

CMA, however, argues that it’s due to increased demand from the local investors.

“The skewed shareholding of corporate bonds by local investors to the tune of 98 per cent is an indication of demand by local investors – retail and institutional for corporate bonds as they contribute towards the growth and development of local companies,” CMA says in the soundness report.

CMA adds it is working with potential issuers to facilitate the issuance of corporate bonds “in the near future.”

“Despite a slowdown in the corporate bond market in the last few years, the authority is working closely with potential issuers to facilitate corporate bond issuance in the near future, with the successful issuance of the Acorn Medium Term Note in 2019 showing signs of positive market interest in the corporate bond market.”

CMA said that with the establishment of the Kenya Mortgage Refinancing Company (KMRC) last year, the bond market is projected to deepen.

“It leverages on capital markets to raise funds through bonds for on-lending to banks and other mortgage financing companies,” CMA said.

 Green bonds

Last month, a Sh4.3 billion green bond started trading at the Nairobi Securities Exchange.

The five-year bond, issued by real-estate developer Acorn, will be listed in three tranches, with the newly listed first tranche floated at Sh786 million.

NSE watchers expect the bond to renew confidence in the overall corporate bond market.

EABL was the last company to issue a bond at the NSE in April 2017.

Oundo believes that the green bond will be “catalytic.”

“We think it’s going to create a new interest in the market … it had an 80 per cent uptake being a first issuance that speaks volumes. I expect to see a lot of interest especially international investors,” he said at the launch.

Eric Musau, head of research at Standard Investment Bank, said that the listing of the Acorn green bond has provided relief.

“The corporate bonds board has had a challenging run over the last few years. The listing of the Acorn green bond provided relief and should be a catalyst for other issuers,” Musau said.

Musau notes that Acorn gave a good rate of return for investors and coupled with the post rate cap era, an appetite for the debt market might pick up.

“Acorn went to great lengths to provide comfort to investors and provided a good rate of return for investors. There is a possibility that future issuers may relax that form of structure. With the recent lowering of the benchmark lending rate, we are likely to see the appetite for the debt market pick up,” he said.

But Kadzutu is of the contrary opinion. He says that not even the green bond can restore confidence as it was being participated by mostly banks, foreigners and no investment funds.

Thus, he says, renewed confidence in the overall corporate bond market can’t be measured by the green bond. “Everyone was pushing it including the Central Bank of Kenya and Kenyan and UK governments,” he said.

The CMA has been trying to tighten oversight and has reportedly directed money market funds to break down where investor cash has been invested as well as terms of the deals.

However, Kadzutu said that the request made no sense as every month funds have to send detailed valuation reports to CMA.

“Every month, funds send valuation reports to CMA which are detailed, I found the request about it outdated,” he said.

Musau says the slow credit uptake should be viewed in the context of what’s happening in the overall economy.

“There is room for credit improvement as confidence picks up. It is important to note that the corporate bond market faces competition from commercial banks which have been luring the right corporates with attractive rates,” Musau said.

Experts have also pointed out at a green future saying that it’s the next frontier for investors.

“I see a green future for the market where future projects coming to the bourse will not only want to be sustainable but also adopt a green tag due to the tax advantages already in place,” Musau said. 

He adds there’s need to innovate a way of giving credit to smaller firms from the capital markets as the recent regulations are heavily skewed in favour of large offerings.

“The current regulatory regime is mostly in favour of larger offerings. Issuers also need to have a better understanding of why certain regulations are in place as protection of investors is critical for a sustainable debt market. Events that erode confidence are normally bad for all actors involved - as we have learnt since the default by several debt issuers,” he said.

Last year, when the Housing Finance Group (HF) retired its Sh3 billion corporate bond it vowed to keep off the debt instrument.

Among the reasons that Group Chief Executive Robert Kibaara gave was “due to reduced confidence levels owing to defaults.”

He said that investors are now increasingly opting for government-issued papers that are less risky.

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