Companies pay a steep price to service dollar loans

Companies that have bank or supplier debt denominated in US dollars have seen their finance costs rise sharply. PHOTO | SHUTTERSTOCK

Companies that have bank or supplier debt denominated in US dollars have seen their finance costs rise sharply on the weakening of the Kenya shilling against the greenback.

The companies including banks, Safaricom, Car & General, Old Mutual Holdings and Unga Group have witnessed a jump in the interest rates charged on the credit facilities as well as an increase in the principal debt as the shilling equivalent of the loans swells.

Their finance costs have increased by millions to hundreds of millions of shillings depending on the size of their borrowings.

The cost of servicing the loans has gone up in response to rising interest rates in the United States and other developed economies seeking to rein in inflation.

The benchmark interest rate in America, for instance, has risen by five percentage points in the past eight months.

The shilling has meanwhile depreciated 18.5 percent against the dollar in the past 12 months alone, compounding the debt service burden.

“Finance costs on borrowing were up 96 percent over the same period in 2022 due to increased interest rates as well as forex losses on the portion of the debt that is US Dollar denominated,” Old Mutual said in a commentary accompanying its results for the half year ended June.

“The Libor, on which basis interest is determined for US dollar loans, moved from 0.59 percent in June 2022 to 5 percent in June 2023 while the Kenyan shilling depreciated by 14 percent against the US dollar over the same period.”

The London Inter-Bank Offered Rate (Libor), is a global interest rate benchmark that was scheduled to be phased out by the end of June 2023.

Old Mutual saw its finance costs rise to Sh1.84 billion in the review period, up from a restated Sh937 million a year earlier.

Unga Group’s finance costs nearly tripled to Sh784.3 million in the year ended June from Sh267.4 million the year before, an outcome it blamed on the depreciation of the shilling.

“Loss from continuing operations increased due to the deprecation of the Kenya shilling and the inability to secure adequate supply of US dollars causing significant forex losses and interest expenses," the food and feeds processor said.

Other companies that have substantial dollar-denominated debt are Safaricom and banks.

The telco has raised its borrowings in the past two years to fund its capital-intensive expansion in Ethiopia. The company, however, does not disclose a breakdown of its borrowings by currencies.

Equity Group is among the banks that have incurred higher finance costs on its foreign loans. A loan it took from the African Development Bank attracted finance costs of Sh814 million last year, rising from the Sh570 million paid in 2021.

Car & General saw the interest rate on its dollar borrowings rise to 9.52 percent in the year ended September 2022 from 6.22 percent a year earlier.

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