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Regulator moves to end corporate bond drought

By Wainaina Wambu | February 25th 2020 at 07:00:00 GMT +0300

The Capital Markets Authority (CMA) is working with credit agencies to address the current “unrealistic pricing” of government bonds that it says have crowded out corporate investors.

This is among the steps that the capital markets regulator has embarked on to restore confidence in the corporate bond market that is running dry owing to a bad history of loss of investor money.

In the last five years, at least five big firms that had floated corporate bonds – including at the Nairobi bourse - have collapsed, causing agony to investors and heavily reduced appetite for the debt instrument.

Chase Bank, Imperial Bank, ARM and Nakumatt are some of the firms that have sunk after they issued corporate bonds.

Others are having problems repaying, including Consolidated Bank and small and medium enterprise lender Real People. However, CMA didn’t regulate the Nakumatt commercial paper as it was under private placement, meaning investors were unsecured and hence can’t claim anything. Investors have, in turn, turned to government bonds due to their low risk and attractive returns.

“Government bonds offer attractive returns of more than 10 per cent and hence crowd out corporate bond potential investors,” said CMA.

“CMA is working with relevant stakeholders including credit rating agencies to address the current unrealistic pricing of government bonds despite their very high rating as risk-free assets.”

Other measures by CMA meant to restore investor confidence include credit enhancement and the use of guarantees in issuance.

“We are working on a multi-pronged approach under our market deepening strategy targeted to restore investor and issuer confidence in the capital markets. Key among them is encouraging issuers to consider credit enhancement and the use of guarantees in their issuance,” said CMA.

The regulator said it is working closely with other State entities including the National Treasury, Attorney General, Central Bank, and Kenya Deposit Insurance Corporation to review laws that support true insolvency netting, settlement finality and segregation of assets held under custodial arrangements from bank deposits.

The regulator said it is encouraging issuance of credit-linked notes or credit default swaps as special corporate bonds with covered risks.

“Further, CMA is designing mechanisms to ensure issuers are more accountable on use of proceeds following capital raising, through continuous monitoring and evaluation,” it noted.

“A draw-down approach where corporate bonds are only funded by investors based on the stage of project completion is also being encouraged.”

Most of the current listed corporate bonds are expected to mature by 2022, with the last one floated back in 2017 by East African Breweries at the NSE.

Debt market

CMA, however, said the recent issuance of the Green Bond by Acorn signalled a renewed confidence in the debt market.

“The issuance of the Green Bond by Acorn is a testament that corporates have strong confidence in the debt market. As part of the initiatives to make them attract new issuance, the Authority is in the process revising capital markets laws to make them less onerous and time-efficient. We expect more issues in the interim period,” said CMA.

Experts argue that CMA and NSE have had weak oversight roles when it comes to investor protection. Imperial Bank collapsed days before its Sh2 billion bond was to be floated.

To protect investors from firms that collapse with bondholder money, CMA wants to obtain management letters by auditors of the issuers, especially for non-listed banks.

“This will be an added layer of due diligence,” it said. The regulator is also reviewing various legal, institutional and regulatory frameworks. These include regulatory provisions for carve-outs, clarity on classification of bondholder monies under the depository insurance scheme and the introduction of the corporate governance template for issuers of securities to the public.

This, it hopes, will enhance sound corporate governance practices and disclosures.

The regulator said a “multi-financial sector crisis management and resolutions framework” might have lessened the impact of the collapse of firms with bondholder money.

It, however, defended itself on why it failed to flag off any warning signs, saying its role was limited to financial information being made transparently available to investors.

“The collapsed institutions had a primary regulator charged with the ultimate responsibility on the frontline oversight of the operations, transparency and reliability of their financial reporting,” said the regulator.

“These institutions had boards and auditors to review their financial information.” It said only the Central Bank could comment on successes of retrieving bondholder money from collapsed banks.

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