High returns attract banks to corporate bonds

Companies have traditionally used their banks to borrow money to meet their growing capital expenditure (capex needs).

But the flow is changing mid stream as corporate players turn to corporate bonds, commercial papers and now private equity and venture capital firms to raise the funds.

Analysts indicate that the determinant of borrowing structure lies with the borrower who considers many factors before determining which financing method to adopt.

“Corporate companies consider many factors when they are planning to borrow funds from the market which may include the cost of borrowing, time limitation and benefits to be accrued”, said Mr Job Kihumba executive director of Standard Investment Bank.

A corporate banker who prefers not to be named due to protocol within his bank says that loan syndication will continue to compete with bonds due to its ease of arrangement, and quick turn around time.

“Loan syndication does not require any regulatory approval like bonds which need a green light from the Capital Markets Authority (CMA) before issuing,” said the banker.

In addition, the cost of arranging a bond is comparatively high with no guarantee of full subscription.

Due to the growing status of the capital market, many issuers prefer issuing bonds in tranches to ensure full uptake.

For instance, Barclays Bank and Safaricom issued their bonds in two tranches, with the first tranche of Sh3 billion and Sh7 billion for Barclays and Safaricom registering total uptake.

The other two tranches of Sh3 billion and Sh7 billion are set to be issued this year.

But Mr Kihumba says the preference for corporate bonds is largely driven by its long term nature as opposed to bank loans which have a short to medium term time frame hence expensive to many corporates in terms of repayment.

The banker agrees that bank loans are typically of short term to medium term periods of not more than five years leading to high cost of repayment over the short time.

“Corporate bonds are issued for longer period of up to 10 years, generally longer than the syndicated loan market or even normal bank loans are prepared to take”, said Alfetta Mungai Koome, regional head of Debt Capital Markets at CFC-Stanbic Bank.

For instance, the KenGen infrastructural bond has a time limit of 10 years while the Total loan is for five years.

Ironically, commercial banks are key players in the bond market as it presents an investment opportunity hence boosting their revenue.