Corporate bonds

Is the corporate bond market on the mend, or is it?

National Treasury, Director General of Public Debt Management Office Wohoro Ndoho (centre) rings the bell at the Nairobi Stock Exchange (NSE) to launch the listing of the M-Akiba bond, a mobile-only commercial bond. [Jonah Onyango, Standard]

The dark cloud that hung over the corporate bond market seems to be dissipating.

With three companies – East African Breweries Ltd (EABL), Family Bank and Acorn Holdings – having successfully raised billions through this form of debt financing, some analysts see a silver lining in a market going through a crisis of confidence.

EABL, an alcohol maker, is the latest to issue and list an 11 billion shillings corporate bond on the Nairobi Stock Exchange (NSE), which has been more than three times oversubscribed.

EABL’s medium-term note was oversubscribed by 245%, with the brewer receiving 37.9 billion shillings.

The company was looking to raise 11 billion shillings of debt in an open offering for 15 days from October 6 this year.

A corporate bond is 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 the principal amount of the bond.

Earlier in July, Acorn Holdings, a property company, closed the latest tranche of its green bond by raising 2.096 billion shillings against a target of 1.438 billion shillings.

Three months earlier, Family Bank had made a comeback in the corporate debt market by raising 4.42 billion shillings, an oversubscription of 147.3%, against a target of 3 billion shillings.

Some analysts see this as a sign of recovery for a market whose confidence has been badly shaken.

Imperial Bank Ltd and Chase Bank fell dramatically with billions of shillings in investor funds, leaving behind a crisis of confidence in the corporate bond market.

Rufus Mwanyasi, managing director of Canaan Capital, writing for a local daily, said the successful issues show that “investor confidence has been restored”.

The recovery in the corporate bond market would complement other forms of corporate debt financing, such as bank loans.

Sara Wanga, head of research at AIB Capital, an investment bank, shares Mwanyasi’s optimism.

Ms. Wanga believes that investors are becoming increasingly risk averse.

“I think there’s an appetite in the market because investors are looking for yield,” she said.

In the case of EABL, the listed company will use the money to fund investments in production expansion, repay debts incurred in the normal course of business, refinance short-term borrowings and provide working capital.

EABL and Family Bank, sensing a liquid market brimming with cheap money, had already redeemed their bonds before maturity.

“The prepayment of the EABL bond, the redemption of Family Bank’s five-and-a-half-year medium-term note and the subsequent oversubscription of the bank’s bond signal a strong recovery and strength in the debt markets of the businesses in Kenya,” the Capital Markets Authority (CMA) said in one of its recent reports.

But not everyone is optimistic that the market has turned the corner.

Ndoho Wahoro, CEO of Euclid Capital and former managing director of public debt management, believes it is too early to tell.

“Two or three drops of rain don’t make a rainy season,” Mr Ndoho said.

He insisted, however, that a robust corporate bond market like Kenya’s – which is struggling with poor governance in what he describes as a “cowboy economy” – is a vote of confidence in the management of institutions.

Family Bank, for example, made fundamental changes to its organizational structure, a move that might have appeased investors.

Additionally, investors might have been attracted by the strength of EABL, the region’s largest brewer affiliated with global giant Diageo.

Churchill Ogutu, an economist at Mauritius-based IC Asset Managers, says investors are still haunted by old corporate bonds that have turned toxic.

“This means that for any potential new issuer entering the corporate bond market, there is an inherent stigma,” Ogutu said.

He further explained that most issuers either had collateral, for example, in the Acorn Green Bond, or in the case of EABL and Family Bank they were recurring issuers.

According to Ogutu, investors are not tense when it comes to putting money into recurring issuers, as they derive some confidence from their previous issues.

And spooked by a drop in confidence, issuers have generally avoided the general public and instead turned to institutional investors who can control the inherent risks.

A growing number of companies have opted for early redemption of their corporate bonds.

These include Britam, Stanbic, NCBA and Centum.

As of December 31 last year, total outstanding issues were 19.13 billion shillings, an increase of 5.11% from 18.2 billion the previous year.

This increase is due to the issuance of a bond by Centum Investment subsidiary Centum Real Estate to raise 4 billion shillings with a green shoe option – which allows the underwriter of a public offering to sell additional shares to the public. if demand is high – from 2 billion shillings.

“A key consideration for investors looking to invest in corporate bonds has been the fundamentals of the company they are investing in,” said Wanga of AIB Capital.

The second consideration, she added, is the rate of return.

“Investors are looking for an attractive rate of return, which applies to corporate bonds.”

Since corporate bonds are riskier than treasury bills – long-term government securities – their price tends to be high.

Mwanyasi of Caanan Capital insisted that the recovery in the corporate bond market is essential for two reasons.

First, excessive reliance on bank loans for debt financing exposes an economy to the risk of financial system failure.

Second, with diminishing lending to the private sector, an alternative to bank credit is needed.

In the United States, for example, a large portion of corporate borrowing comes 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 surging interest in Treasuries, Ndoho believes, is bound to spill over into corporate bonds.

The current economic downturn, Ndoho said, may also have reduced the appetite for a stake in a company.

A corporate bond, unlike having a share in a company, is paid in the form of interest and principal at the end of a certain period.

Regardless of the issuer’s performance, the company is obligated to pay its debt.

Unlike stocks, investors only profit when the company is profitable and its stock price increases.

However, there is a drag after Kenya Mortgage Refinance Company (KMRC) postponed issuance to next year.