Dented corporate bonds market on the mend, or is it?
By Dominic Omondi | November 9th 2021
The dark cloud that has ominously hung over the corporate bond market seems to be lifting.
With three companies - East African Breweries Ltd (EABL), Family Bank and Acorn Holdings - successfully raising billions from this form of debt financing, some analysts see a silver lining in a market that is undergoing a confidence crisis.
EABL, an alcoholic manufacturer, is the latest to issue and list an Sh11 billion corporate bond at the Nairobi Securities Exchange (NSE), which was oversubscribed more than three times.
EABL’s medium-term note was oversubscribed by 245 per cent, with the brewer receiving Sh37.9 billion.
The firm was looking to raise Sh11 billion in debt in an offer that was open for 15 days beginning October 6 this year.
A corporate bond is a debt issued by a company to raise capital from the public.
Investors who buy corporate bonds lend money to the company issuing the bond. At the end of a certain period, they receive the interest and principal amount on the bond.
Earlier in July, Acorn Holdings, a real estate company, closed the final tranche of its green bond by raising Sh2.096 billion against a target of Sh1.438 billion.
Three months before, Family Bank had made a return to the corporate debt market by raising Sh4.42 billion, an oversubscription of 147.3 per cent, against a Sh3 billion target.
Some analysts see this as a sign of recovery for a market whose confidence has been badly battered.
Imperial Bank Ltd and Chase Bank spectacularly went down with billions of shillings in investor funds, leaving behind a confidence crisis in the corporate bond market.
Rufus Mwanyasi, the managing director at Canaan Capital, writing for a local daily, opined that successful issuances show that “investor confidence has recovered.”
Recovery of the corporate bond market would complement other forms of debt financing for businesses, such as bank borrowing.
Sara Wanga, the head of research at AIB Capital, an investment bank, shares Mwanyasi’s optimism.
Ms Wanga reckons that investors are increasingly becoming risk-averse.
“I think there is an appetite in the market because investors are chasing return,” she said.
In the case of EABL, the listed company will use the money to finance investments in expanding production, repay debts taken in the ordinary course of business, refinance short-term borrowings and provide working capital.
EABL and Family Bank, sensing a liquid market brimming with cheap money had earlier on redeemed their bonds before maturity.
“Early redemption of the EABL bond, the redemption of Family Bank’s five-year and half medium-term note, and subsequent oversubscription of the bank’s bond signals strong recovery and soundness of corporate debt markets in Kenya,” said the Capital Markets Authority (CMA) in one of its recent reports.
But not everyone is optimistic that the market has turned the corner.
Ndoho Wahoro, the chief executive of Euclid Capital and former director-general of public debt management, reckons it is too early to tell.
“Two or three raindrops do not make a rainy season,” said Mr Ndoho.
He, however, insisted that a robust corporate bond market like Kenya’s - which is grappling with poor governance in what he describes as a “cow-boy economy” - is a vote of confidence in the management of institutions.
Family Bank, for example, made some fundamental changes to its organisational structure, a move that could have assuaged investors.
Moreover, investors might have been lured by the strength of EABL, the largest brewer in the region with affiliation to global giant Diageo.
Churchill Ogutu, an economist at Mauritius-based IC Asset Managers, argues that investors are still haunted by legacy corporate bonds that went toxic.
“This means that for any new potential issuer coming to the corporate bond market, there is an inherent stigma,” said Mr Ogutu.
He further explained that most of the issuers either had a guarantee, for instance, in the Acorn Green Bond or in the case of EABL and Family Bank they were repeat issuers.
According to Ogutu, investors are not uptight when it comes to putting money in repeat issuers as they draw some confidence from their previous issues.
And spooked by a sag in confidence, issuers have generally avoided the general public and instead gone after institutional investors who can vet the inherent risks.
An increasing number of companies have opted for the early redemption of their corporate bonds.
These include Britam, Stanbic, NCBA and Centum.
As of December 31 last year, the total outstanding amount of issues was Sh19.13 billion, representing a 5.11 per cent increase from Sh18.2 billion reported the previous year.
This increase was due to the issuance of a bond by Centum Investment subsidiary Centum Real Estate to raise Sh4 billion with a greenshoe option - which allows the underwriter of a public offer to sell additional shares to the public if the demand is high - of Sh2 billion.
“A key consideration for investors looking to invest in corporate bonds has been the fundamentals for the company that they are investing in,” said AIB Capital’s Wanga.
The second consideration, she added, is the rate of return.
“Investors are looking for an attractive rate of return, which applies for corporate bonds.”
Because corporate bonds are riskier compared to Treasury Bonds - long-term government securities - they tend to be priced expensively.
Caanan Capital’s Mwanyasi insisted that the recovery of the corporate bond market is critical for two reasons.
First, that over-reliance on bank lending for debt financing exposes an economy to the risk of a failure in the financial system.
Second, with lending to the private sector dwindling, an alternative to bank credit is needed.
In the US, for example, much of the borrowing by companies is from corporate bonds.
Euclid Capital’s Ndoho agrees with Wanga that there has generally been a huge appetite for financial assets that yield positive returns.
The gushing interest in Treasury Bonds, reckons Ndoho, is bound to overflow into corporate bonds.
The prevailing economic downturn, said Ndoho, might also have reduced the appetite for a shareholding in a company.
A corporate bond, unlike having a share in a company, is paid through interest and principal at the end of a certain period.
Regardless of the performance of the issuer, there is an obligation by the company to pay its debt.
This is unlike shares where investors get to benefit only when the company is profitable and its share price is going up.
However, there is a damper after Kenya Mortgage Refinance Company (KMRC) put off its issuance to next year.
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