Fashion retailer Deacons East Africa has taken a Sh1.3 billion debt at an interest rate of 21 per cent, about one-third higher than ordinary bank debt whose cost is capped at the maximum interest rate of 14 per cent.
The Nairobi Securities Exchange-listed firm has disclosed in its latest annual report that it borrowed Sh1.58 billion at rates ranging between 15 per cent and 21 per cent by issuing debentures to NIC Bank #ticker:NIC and Bank of Africa (BOA).
A debenture is a debt security issued by a company and secured against its assets.
“NIC Bank Limited holds an all assets debenture over the company’s assets for (debt) totaling Sh1.3 billion shared on a pari-passu basis with BOA,” Deacons says in the report, adding that the lender is charging an interest rate of 21 per cent.
BOA, on the other hand, is charging the firm interest of 15 per cent for the Sh200 million it advanced the fashion retailer, and which is also secured by its assets.
The two banks have signed an agreement acknowledging their joint claims on Deacons’ assets.
Interest rates on the debentures represent a major premium on the maximum 14 per cent currently applicable on bank loans.
Deacons’ chief executive Muchiri Wahome had not responded to our queries by the time of going to press.
Kenyan banks tightened their credit standards following the introduction of interest rate controls in September last year, with riskier borrowers turned away or offered reduced loan sizes and shorter repayment periods.
Deacons, for instance, had bank loans of Sh469.5 million in December last year, but the use of debentures allowed it to raise its total borrowings beyond the Sh1.5 billion mark.
Individuals, small and medium-sized firms have suffered the most from the credit rationing that has seen banks ramp up their investment in government debt securities in search of safe returns.
Deacons and its regional subsidiaries have been taking bank loans at rates of up to 26.5 per cent, with the capping of lending rates in Kenya prompting the company to rely more on debentures to house the debt at rates outside the regulated threshold.