Since the successful issuance of the 25 billion shilling KenGen #ticker:KEGN public infrastructure bond in 2009, the local corporate bond market has yet to reach the same heights.
Plagued by issuer meltdowns and defaults in recent years, the segment appears to have taken a step back from actively issuing corporate bonds, with investors who poured their money into both problematic issues from Chase and Imperial banks still seeking redress over their spending.
Most issuers have repaid their bonds and opted for other sources of funding, including loans from banks, shareholders, private equity and development finance institutions.
At the end of December 2020, there were only six commercial papers in circulation worth 19.1 billion shillings, according to the Financial Markets Authority’s first quarter 2021 statistical bulletin.
This is a marked drop from 20 commercial paper valued at 61.9 billion shillings at the end of 2018.
Corporate bond turnover as a percentage of total Nairobi Security Exchange bond turnover #ticker:NSE also stands at a negligible 0.08%, compared to 99.92% for bonds of the Treasury.
Against all odds, the recent success of the 4 billion shillings Family Bank bond (first tranche of a total program of 8 billion shillings) shows the enduring resilience of the market.
Family Bank’s return to the corporate debt market shortly after buying a 2 billion shillings bond in April proves that investor confidence has been restored.
The offering follows the equally successful issuance of the 4 billion shillings corporate bond in November last year by the #ticker:CTUM real estate arm of Centum. In total, the two issues bring the total number of investment grade bonds traded on the NSE to four, the other two being the #ticker: EABL Sh6 billion paper from East African Breweries Limited and the 7 billion bond Sh of Acorn.
The big question is whether we will see more companies entering or re-entering the corporate bond market, especially commercial banks and financial institutions which have traditionally been the most popular issuers of these papers.
There are various reasons why we need a booming corporate bond market. First, it has been argued that an overreliance on bank lending for debt financing exposes an economy to the risk of financial system failure.
The implication is that a banking crisis may negatively affect economic activity and that firms would, therefore, find themselves credit constrained and would therefore be forced to abandon investment spending.
Second, with the decline in lending to the private sector, an alternative to bank credit is essential. At 2.86 trillion shillings in March 2021, credit to the private sector accounted for 65% of total net domestic credit, up from 70% a year ago.
It is worrying that the market expects the same trend to continue given the increase in non-performing loans (which represented 14.5% of gross bank loans in December 2020, compared to 12.5% in December 2019 ) and the preference of banks to lend to the State through government securities.
So we can only hope that the “sick child” of capital markets is finally back.
As the Central Bank of Kenya (CBK) and the capital markets regulator scramble to resolve issues with the Chase and Imperial Bank bond issues, the resurgent presence of an active Chase bond market companies is a welcome change.
Mr. Mwanyasi is the Managing Director of Canaan Capital