The rise in Treasury bill rates to an eight-year high is exposing companies that have taken out loans pegged on the rate to high finance costs, raising their cost of doing business in an already challenging economic environment.
Floating rate facilities issued to local firms are often priced using the rates on Treasury bills as a base before adding a margin while others use the Central Bank of Kenya’s base rate (CBR) as the peg for costing facilities.
In last week’s Treasury bills auction, the yield on the 364-day paper went up by 49 basis points to hit 15.22 percent, the highest seen since November 2015.
The rates on the 182-day and 91-day T-bills are lying just shy of the 15 percent mark at 14.94 percent and 14.79 percent respectively.
A year ago, the three tenors carried yields of between 8.9 and 9.9 percent, meaning the effective interest rates on facilities pegged on the securities has risen by up to six percentage points.
The CBR was raised at the end of June by a percentage point to the current 10.5 percent, having gone up steadily from seven percent in March 2022. This has had the effect of raising the cost of facilities pegged on the rate.
Among listed firms, EABL, Crown Paints and Centum have made recent disclosures of facilities whose interest is pegged on T-bills and the CBR.
EABL said in its 2023 annual report that as at end of June this year, it held four loans with local banks pegged on the 91-day and 182-day papers, totalling Sh26.3 billion.
The facilities, which mature between September 2023 and June 2030, carry premiums of between 1.5 percent and 2.45 percent on the Treasuries.
The brewer also reported a facility worth Sh3 billion whose rate is the CBR plus one percentage point.
Crown Paints in its annual report for 2022 disclosed that by the end of last year, it held short-term borrowings with KCB and NCBA totalling Sh521.7 million to cover import financing that was priced at the rate of the 91-day T-bill plus 1.5 percent.
The facilities were due to mature by June.
Centum Group meanwhile disclosed in its annual report for the year ending March 2023 that its subsidiary Longhorn Publishers holds a Sh762.7 million loan with Standard Chartered Bank Kenya that is priced at CBR plus four percent.
Customer deposits
The effect of higher T-bill rates does not just affect those with a direct rate peg, however, with the general cost of credit in the economy tending to go up in tandem with that of the securities due to the factor of cost of money for banks.
Banks use a base rate which is normally the cost of funds, plus a margin and a risk premium, to determine how much they charge a particular customer.
When T-bill rates go up, banks raise deposit rates to attract customer deposits and stay competitive in comparison to other investment assets, and then pass on the extra cost to borrowers.
