Aug 1, 2021

Mawazo Writing Africa

Writing about the main

CMA pushes Kenyan firms to acquire bank-backed guarantees in bond issue

Kenya’s Capital Markets Authority (CMA) is working on new measures to revive the troubled corporate bond market that will see companies with weaker balance sheets forced to acquire bank guarantees to protect investors’ interest in the event of default.

The market regulator is seeking ways to deal with credibility issues that hit the corporate bond market after the collapse of issuers such as Chase Bank, Imperial Bank, Nakumatt, and cement maker ARM without a clear-cut compensation mechanism for bondholders.

Under the proposed measures companies seeking to issue bonds will be required to undergo financial due diligence with those having weaker balance sheets forced to acquire guarantors from banks or other financial institutions to protect the investors’ savings.

In addition, companies, particularly those issuing asset-backed securities will have to undergo credit rating for their risk positions to be well captured.

“On protection of investors, two initiatives are on the table. One is to encourage credit rating of the issuances so that the risk position is captured to help investors decide on whether to participate. Second, credit enhancement at different layers. For instance, one could get a guarantor to support either the principal amount or partial as well as the interest payment,” the authority’s CEO Wycliffe Shamiah told The EastAfrican last week.

Integrity matters

“Enhancement could be through collaterisation where issuers’ specific assets may be set aside to cover potential default. However these considerations depend on the strength of the balance sheets of those interested in issuing the bond. If solid and reputation is high, the risks are less. Usually guarantors would be banks, other financial institutions, and related companies or those specialised in the business of guaranteeing such as Guarantco.”

Kenya’s corporate bond market is gasping for breath after a string of defaults dampened investor confidence in lending to companies.

CMA data shows that Treasury bonds dominate the market, accounting for 99.92 per cent of the debt market, with corporate bonds at a paltry 0.08 percent.

Kenya has six listed corporate bonds valued at Ksh9.88 billion ($92.33 million) after the Chase Bank bond valued at Ksh4.82 billion ($45.04 million) was suspended from trading after the lender was put into receivership in April 2016.

Investors have lost confidence in the market due to the high default rates by companies on their loan obligations and failure to compensate bondholders once financially distressed firms go under.

Regionally, the corporate bond markets are not doing well either.

Rwanda has had two corporate bonds listed on the Rwanda Stock Exchange (RSE) that included an eight-year corporate bond worth Rwf10 billion ($9.78 million) issued in 2010 by I&M Bank (previously Commercial Bank of Rwanda) that matured in 2018 and five-year bond worth Rwf15 billion ($14.68 million) floated by the International Finance Corporation in 2014.

“Our markets are not deep enough and the instruments limited. They are dominated by traditional bank lending. The money market instruments, particularly the fixed income segment are dominated by government issuance,” said Celestin Rwabukumba, chief executive, RSE.

Weak structures

“Companies’ governance structures in general and their accountability also matters. A few corporate bonds have failed in markets like Kenya. Such scandals scare away investors and would-be issuers,” added Mr Rwabukumba.

The Dar es Salaam Stock Exchange has seen nine companies issue 13 corporate bonds worth Tsh173 billion ($74.45 million while in Uganda, the Uganda Securities Exchange has listed one corporate bond since 2013 — sugar manufacturer, Kakira Sugar’s Ush76 billion ($21.35 million) corporate bond.

Only nine corporate bonds have been issued in Uganda, raising a combined Ush289 billion ($81.22 million), with majority of issuers being financial institutions in banking), according to the Capital markets Authority of Uganda.

In 2019, the Ugandan capital markets regulator hired a consultant with support from Financial Sector Deepening Africa to review the Corporate Bond Guidelines, 2003, to make it easier and faster for more private companies and local governments to raise alternative non-bank financing for business growth and project development.