KenGen lines up NSE’s first asset backed bond sale
KenGen shareholders tour Olkaria geothermal plant in Naivasha last year. The company estimates that it needs about Sh437 billion within the next five years to keep pace with rapidly growing demand for power. File
What you need to know:
KenGen aims to raise Sh30bn to double output by 2018.
The power firm needs the funds in the next five years to reach a goal of doubling total generating capacity to 3,000 mega watts.
The 20-year bond will be repaid using cash generated from the geothermal plants being constructed.
Electricity generator KenGen has lined up Kenya’s first ever asset-backed bond sale that is expected to raise Sh30 billion to finance its geothermal expansion plans.
KenGen managing director Eddy Njoroge said on Thursday the power firm needs the funds in the next five years to reach a goal of doubling total generating capacity to 3,000 mega watts (MW) by 2018.
This will mark the first time that a company in Kenya has issued an asset-backed bond since the Capital Markets Authority (CMA) passed the capital markets (asset backed securities) regulations 2007.
The 20-year bond will be repaid using cash generated from the geothermal plants being constructed.
“We plan to use the steam already drilled as collateral to raise additional affordable capital from the market. We shall use this capital to build power plants and use the revenue from the sale of power to pay those who have invested in us,” said Mr Njoroge during a tour of the Olkaria Geothermal Power plant in Naivasha.
KenGen estimates that it needs $5 billion (Sh437 billion) within the next five years to keep pace with rapidly growing demand for power.
The Asset Backed Securities Regulations 2007 allow companies or issuers of bonds to transfer an asset which has clear cash flows to a separate institution, in which case this separate entity then issues a bond. The cash flows from the asset are used to service the repayments of the bond.
The move could help cut KenGen’s financing costs as opposed to a rights issue or bank loans.
Standard Investment bank analyst Eric Musau, said that such a bond would be suitable when raising large amounts of money where a company may not have assets of such value to act as collateral.
“The idea is to figure out what security you can offer for such a bond, and because it is a large amount a company may not have assets to put upfront and therefore this form of financing comes in handy,” he said.
Unlike ordinary bonds whose pricing is pegged on the three-month Treasury bill rates, the pricing of the bond may be benchmarked against the 20-year treasury bonds rates given that it is a long-term debt.
Kestrel Capital research analyst Kuria Kamau, while lauding the move as a positive one, sees risks in KenGen’s bid to pioneer issuing the asset-backed bond.
Mr Kamau said uptake of the security may be affected by the little experience that Kenyan investors have of such bonds.
“This move increases leverage for the company in terms of its financing options since it is cheaper in terms of cost of capital,” said Mr Kamau.
“As the first one in Kenya, there may be issues with the uptake as people are not fully aware of it. There is word that the CMA may be updating the regulations as well since no firm had issued a product like that since the regulations were enacted.”
In the Menengai geothermal fields in Nakuru, the Geothermal Development Company (GDC) has received loans of $120 million (Sh10.5 billion) from the African Development Bank for drilling of steam wells in phase one of the geothermal power production at the site, which is expected to inject 400MW of power into the national grid by 2017.
