Centum Investment Company has bought Sh1.9 billion Eurobonds that are giving it an average return of nearly 14 per cent, taking advantage of the high returns on offer in sovereign debt to boost its investment income.
James Mworia, the chief executive, told Business Daily the bulk of the bonds are Egyptian securities but that it has also taken up some of Kenya’s Eurobonds that trade on the London and Irish stock exchanges.
Companies and individuals can invest in Eurobonds in the secondary market, with this option becoming increasingly attractive due to higher yields and new platforms that are opening access to offshore markets.
“We bought at a steep discount to par value…at 72 cents to the dollar. That was the time when global interest rates were going up so there was a flight of capital from African Eurobonds to the US. We also bought some Eurobonds before the Kenyan General Elections when there was panic,” said Mr Mworia.
“Some of these bonds were trading at yields of as high as 19 per cent, so it was a very interesting opportunity at that time so we switched. The other advantage of Eurobonds is because the rates have gone up so high you are buying them at a deep discount to face value, and some of them have very short maturity periods, so you can have a very significant capital gain as well.”
Mr Mworia said Centum’s Eurobonds portfolio has an average yield to maturity — total return comprising principal and interest payments of 13.96 per cent.
The range of returns (YTM) on the securities is 11 per cent to 21.1 per cent.
To raise the funds to invest in the Eurobonds, Centum sold off some of its holdings of local currency (shilling) bonds whose market value was falling due to rising rates on new auctions of the fixed-income securities.
Centum, therefore, took on some losses when making the switch, but the high return on the external dollar-denominated bonds was deemed sufficient to make up for these haircuts.
The company, however, still holds local bonds in its portfolio.
While the coupon (interest rate) paid by the issuer — in this case, the government — does not change during the life of a bond, investors buying the papers in the secondary market can enjoy a higher real return once price discounts are factored in, or a lower return where they are forced to pay above face value to access a bond.
The impact of the Eurobond investments is expected to reflect on the company’s investment income, which stood at Sh713.4 million in the six months to September 2022.
The group’s total investment portfolio at the end of the period stood at Sh42.2 billion.
Centum’s net loss widened to Sh1.55 billion in the six-month period to September compared to Sh243.6 million a year earlier, largely driven by unrealised foreign exchange losses.