From huge profits to junk paper: The fall of Kenya’s corporate bond market

Capital Markets Authority acting CEO Wycliffe Shamia (R) and Nairobi Stock exchange CEO Geoffrey Odundo during a workshop on Sovereign Green Bond Project at Enashipai Resort in Naivasha in January 2020. Shamia exuded confidence that the performance of the Nairobi Securities Exchange (NSE) will improve this year. [Antony Gitonga, Standard]

After enjoying big rewards, bondholders are now staring at big losses.

The market has remained illiquid for some time now.

From the look of it, no corporate bond portfolio was safe as each sector saw their underlying bonds lose value and demand in the secondary market, thanks to the confidence crisis triggered by the collapse of key bonds.

The saving grace seems to be the green bond that began trading at the Nairobi Securities Exchange (NSE) earlier this year.

Besides, two bonds have in the last few months received an early call, meaning the issuing companies have made arrangements to settle the debt before their maturity.

The last five years have seen at least five big firms that have floated a corporate bond, including at the NSE, collapse spectacularly, inflicting endless grief on investors.

Since then, capital markets experts led by the regulator have been scrambling to restore confidence, but the appetite for the private commercial paper seems to have died long ago.

Investors often focus on stock and bond prices as a measure of an economy’s health.

If the returns are high and rising, they feel upbeat. Conversely, if price levels sink low, so does investor confidence.

Things remain shaky after the recent retail and banking crisis that dealt a major blow to market confidence.

Some experts are now worried about a looming bubble in corporate debt.

But the regulator has played down the current depressed market, saying the trend does not reflect a decline in general market performance that has remained upbeat.

“The belief that firms are shunning the capital markets may, therefore, not be based on fundamentals. Yes, there is a decline in activity in the corporate bonds market, but it is inaccurate to suggest that the capital market is on a decline,” said CMA in a statement.

Chase Bank, Imperial Bank, Athi River Mining (ARM) and Nakumatt are some of the firms that have sunk with unpaid corporate bonds.

Others having problems repaying include Consolidated Bank and SME lender Real People.

EABL was the last company to issue a bond at the NSE in April 2017.

The acting chief executive of CMA, Wyckliffe Shamiah, has been on overdrive, coming up with ways to restore confidence in bonds amid fear of a complete drought as most listed bonds mature by 2022.

Investors seem to have long settled on government bonds, encouraged by their guaranteed security.

There are 68 listed government bonds in contrast to six corporate bonds.

According to the Capital Market Soundness Report Quarter 2, Treasury bond turnover averaged almost 100 per cent compared to 98.66 per cent in the first quarter of the year.

“The Kenyan market continues to be highly exposed to government bonds, with a total of 68 listed government bonds (27 as of end June 2020) vis-a-vis six corporate bonds, translating into the significant turnover levels for Treasury bonds,” said the CMA report.

The six corporate bonds are the CBA fixed medium-term note that matures in December, the EABL fixed medium-term note maturing in March 2022, Chase Bank fixed medium-term note maturing in June 2022, the Family Bank medium-term note maturing in April 2021 and the Acorn Green Bond medium-term note maturing in November 2024.

Firms have vowed to stay off the debt instrument owing to uncertainty.

Last year, Housing Finance Group (HF) retired its Sh3 billion corporate bond, with Group Chief Executive Robert Kibaara saying this is “due to reduced confidence levels owing to defaults”.

Sanlam, which lost money from collapsed retailer Nakumatt’s commercial papers, has also vowed to keep off corporate bonds until investor protection guidelines are introduced.

In January, a Sh4.3 billion five-year green bond started trading, with analysts saying it would renew confidence in the bond market.

It was issued by real-estate developer Acorn and will be listed in three tranches, with the newly listed first tranche floated at Sh786 million.

Local corporate bond investors lead the investors in corporate bonds at over 95 per cent, while foreign investors stand at 3.79 per cent as of the end of the second quarter.

CMA hopes to reverse the corporate bond drought by working with the private sector to increase participation of Micro, Small and Medium-sized Enterprises (MSMEs) in the capital markets. This is in a bid to see them listed.

“To facilitate this, the authority is currently undertaking a review of its public offers listing and disclosures regulations following engagements with stakeholders on the need to create a conducive environment to facilitate increased participation by corporations in the market through bond issuances,” said the regulator.

However, things are also not rosy in terms of Initial Public Offerings (IPOs) at the NSE.

Governance requirements

The Growth Enterprise Market Segment (GEMS) of the bourse, which is meant to encourage small firms to list, has performed poorly.

The segment, launched in 2013, has only attracted five firms since then. It was expected to list 19 firms by 2017 and 39 by 2023.

CMA also said it is reviewing corporate governance requirements for MSMEs in the country.

As a long-term investment opportunity, the regulator hopes that local manufacturing boosted by government support can also restore confidence.

Despite Covid-19, local manufacturing has been growing, with companies moving into the production of health products such as personal protective equipment.

CMA hopes they can raise capital through the bond market.

“The management anticipates a situation where manufactures in the health sector will require huge funds for production and expansion. The capital markets industry offers a perfect opportunity where these firms can raise long-term funds through the issuance of corporate bonds,” says the regulator.

On innovation, CMA has admitted companies in its regulatory sandbox are set to use technology in matters bonds.

One is Pyypl Group Ltd that seeks to use blockchain technology to facilitate the issuance of unsecured bonds.

Critics have also faulted CMA and NSE, saying they’ve played a weak oversight role.

Lack of transparency in companies has at the same time been an issue, with investors in commercial papers such as the collapsed Nakumatt largely unable to verify the financial health of companies.

CMA didn’t regulate the Nakumatt commercial paper as it was under private placement, meaning investors were unsecured and hence can’t claim anything.

Schools, wealth management funds, insurance agencies and individuals are among 800 commercial debt paper holders who have lost Sh4 billion from fallen retail giant Nakumatt.

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