High loan costs tip scales in favour of rights issues

High cost of borrowing has tipped the scales in favour of rights issues as firms looking for expansion capital shun expensive bank loans and corporate bonds.

NIC Bank will become the third listed company and the second commercial bank to tap the market for funds through a rights issue next Monday, a week after the close of Diamond Trust Bank (DTB) cash call which closed last Friday and almost two months after the Kenya Airways offer.

There has only been one bond issue so far this year — by Consolidated Bank — which is expected to start trading this morning.

NIC started distributing information on the upcoming rights issue last Friday and is seeking Sh2.07 billion through the sale of 98.72 million new shares to be offered to existing shareholders in the ratio of one new share for every four held.

DTB, whose issue closed last Friday, was seeking Sh1.8 billion through the sale of 24.45 million shares in the ratio of one new share for every eight and results on the three-week share sale will be announced in the first week of next month.

“The debt market is more long-term and currently the market is quite expensive.

People are expecting that rates will come down,” said Wilson Nyakera, managing director, NIC Capital who added two other listed companies are expected to tap the market with bond issues in the coming weeks.

NIC Capital was the transaction advisor for Consolidated Bank which managed to raise Sh1.7 billion out of the Sh2 billion it was seeking in a bond offer whose sale came at the same time as the two government bonds.

The bond is paying interest at a fixed annual rate of 13.25 per cent or at a floating rate that is pegged on the 182-day Treasury bill rate plus two per cent but at a minimum of 10 per cent and a maximum of 13.75 per cent, but was not offering a discount like the government bonds.

The fixed interest rate that Consolidated Bank is paying makes it one of the most expensive among corporate bonds.