Money Markets
High returns attract banks to corporate bonds
Applying for the KenGen Public Infrastructure Bond in Nairobi last year. The preference for corporate bonds arises more from their longer repayment period and relative ease of arranging. Photo/FREDRICK ONYANGO
Banks have turned a missed business opportunity into a cash cow by investing heavily in corporate bonds in response to thinning opportunities for commercial lending in an uncertain economic environment.
Uncertain of their ability to service commercial bank loans and with a bleak business outlook, corporates have preferred debt instruments like bonds and commercial paper over bank loans to fund their operations and expansion.
But rather than weep over the loss of business to dealmakers in the capital markets, banks have taken refuge in the safe havens, with bonds offering assured returns on their investments with virtually no risk of default that would stalk lending during depressed times.
According to bankers, the preference for corporate bonds arises more from their longer repayment period and relative ease of arranging.
“A bond issue is much simpler and the terms are determined by the single issuer, with advise from an investment bank/adviser,” said Mr James Macharia, the Managing Director of NIC Bank.
In the last five months of last year, for instance, the bond market registered the busiest season with five corporate bonds and one government infrastructure bond coming to the market.
The corporate bonds raised a total of Sh35 billion with the government two infrastructural bond netting Sh37 billion.
Three other corporate bonds estimated to be worth over Sh2.3 billion are in the pipeline while the government will issue the third infrastructural bond in February this year.
For banks, competition has arrived at their door step. But they are taking it in their stride.
For instance, the Sh25 billion KenGen Infrastructure bond had 80 per cent reserved for institutional investors.
A market player closely involved in the KenGen bond informed Business Daily that commercial banks were actively involved with close to 50 per cent application for the Sh21 billion reserved for the institutional and foreign investors.
In deed, a middle size bank is reported to have put in Sh1.3 billion.
Beside the issuance of corporate bonds, the setting up of shop by private equity (PE) and venture capital (VC) is set to up competition for funds by businesses seeking to expand their operation but are held back by capital scarcity or the unwillingness on the part of the lender to assume business risk.
PE and VC operate on the premise of offering funds to start ups, early stage and growing business but at the same time assume the risk associated with the business.
Typically, PEs and VCs will avail funds and take a stake in the running of the business.
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