Capital Markets

Interest rate caps save seven NSE-listed firms Sh800m finance costs

arm

From left, ARM Cement chief executive Pradeep Paunrana, Deacons Kenya Limited CEO Muchiri Wahome and Flame Tree Group managing director Heril Bangera. Their firms have emerged as among the biggest beneficiaries of the new law regulating interest rates. PHOTOS | FILE

A recent capping of interest rates has re-priced Sh26.9 billion worth of loans held by seven listed companies, promising them savings of more than Sh800 million in annual finance costs, according to the latest analysis.

ARM Cement, East African Cables, property developer Home Afrika, Uchumi Supermarkets, fast moving consumer goods manufacturer Flame Tree and fashion retailers Deacons and Nairobi Business Ventures have emerged as the biggest beneficiaries of the new law regulating interest rates even as the lenders continue to warn about the danger to the economy of interest rate controls.

The Nairobi Securities Exchange-listed (NSE) firms had taken local bank loans amounting to Sh26.9 billion at rates of between 15.5 per cent and 19 per cent, making the maximum 14.5 per cent allowed under the new interest rate regime a significant cut in their financing costs.

Effective Wednesday, the loans were priced down to 14.5 per cent in line with the Banking (Amendment) Act 2015, which sets the ceiling for lending rates at four percentage points above the Central Bank Rate (CBR) currently standing at 10.5 per cent.

While the new law has saved existing and new borrowers significant sums in interest expenses, it is set to narrow margins of banks including KCB Group, Barclays Bank of Kenya and Citibank that form part of lenders that had provided credit to the seven firms under the previous regime.

“Reduction in cost of debt is a welcome relief,” said Muchiri Wahome, the chief executive of Deacons, which relies on bank loans to finance its working capital.

“It is good for everyone, including consumers, who will now have more disposable income that will flow back to retailers and other businesses,” he said of the rate caps.

The seven companies represent loss-making and small firms that were unable to borrow at lower rates unlike the blue chips and state-backed monopolies such as East African Breweries (EABL) and Kenya Power, which have been accessing credit at much lower costs.

ARM is one of the largest beneficiaries of the new law, having taken Sh18.5 billion in bank loans at an interest rate of 18 per cent and Sh3.5 billion overdrafts at 16 per cent.

The company incurred interest expenses of Sh2.3 billion in the year to December alone. The rate cut is expected to slash the company’s finance costs by about Sh600 million.

ARM’s debt load is the major reason it plunged into losses, forcing it to sell a controlling 40.6 per cent stake to UK sovereign wealth fund CDC Group for $140 million (Sh14.1 billion).

The cement manufacturer had said it would use the proceeds to reduce its debt burden that has since been made lighter with the new law.

Chief executive Pradeep Paunrana told the Business Daily that the company will review its earlier intention to retire the loans in the context of lower interest rates.

Barclays, CfC Stanbic, Guaranty Trust Bank, Citibank NA, Bank of Africa, I&M, Victoria and Chase Bank are the lenders that had financed ARM.

East African Cables, which paid interest of Sh125 million on Sh2.6 billion bank loans at a rate of 15 per cent in the year ended December, is also expected to save millions of shillings with the migration to the statutory 14.5 per cent maximum lending rate.

The cables manufacturer is also in multi-year losses, partly brought by a surge in finance costs to Standard Chartered Bank of Kenya, Ecobank and Chase Bank.

Deacons incurred interest expenses of Sh61.7 million on local bank loans amounting to Sh586.6 million in the year ended December, paying interest rates of between 15 per cent and 18 per cent on the debts.

Mr Wahome said the company subsequently reduced its borrowings to Sh300 million, but is currently seeking a new Sh100 million encouraged by the lower interest rate.

NIC and UBA Bank Kenya Ltd are among the banks that have lent to the fashion retailer, which is seeking the new loan to set up at the upcoming Two Rivers mall in Nairobi.

Home Afrika, which is among listed companies to pay the highest interest rates on bank loans, is set to save big with the enactment of the new law.

The property developer had borrowed Sh716.9 million in the year ended December, paying interest expenses of Sh72 million on the debt at a rate of 18.9 per cent.

Uchumi incurred interest expenses of Sh243.2 million amounting to more than a third of Sh705.3 million bank loans in the year ended June 2015, with the retailer saying the rates ranged between 15.5 per cent and 18 per cent. KCB was one of Uchumi’s biggest lenders in the review period.

Flame Tree paid Sh29 million on Sh88.8 million worth of loans in the year ended December to banks that had charged an interest of 18 per cent, with the company set to save millions of shillings in the short term.

Nairobi Business Ventures, retailer of the KShoe brand, got a boost after its Sh100 million medium term loan facility from local banks was re-priced from the previous 19 per cent.

While borrowers who had taken loans at high rates are recording major savings, it remains to be seen how easier it will be to get new loans in an environment where blanket rates are to apply to customers with different risk profiles.