Corporate bonds trade rallies on increased supply


Capital Markets Authority (CMA) CEO Wycliffe Shamiah during the Capital Markets Soundness Report media briefing at the authority's offices on January 30, 2023. PHOTO | DIANA NGILA | NMG

Secondary market trading on corporate bonds picked up in the fourth quarter of last year, reflecting the improved supply of issuances in the market and sales by holders chasing higher returns on offers in government securities.

Corporate bonds turnover, while still a small fraction of the trading on government papers, rose to Sh150.8 million in the three months to December 2022, from Sh11.8 million in the previous quarter of the year, Capital Markets Authority (CMA) data shows.

Over the last two years, there has been an improvement in the number of new issuances floated in the corporate bonds market, including those by Family Bank, Centum Real Estate, EABL, Acorn Holdings and the Kenya Mortgage Refinance Company.

By the end of last year, the value of outstanding issuances stood at Sh29.6 billion, having recovered from a low of Sh19.1 billion seen in December 2020 when there were real concerns over the future of this market segment following earlier defaults and fraud.

“In quarter four 2022, the corporate bond turnover was Sh150.8 million, a drastic increase from the turnover recorded in quarters two and three…the authority anticipates more corporate bond offerings in 2023,” said the CMA in its 2022 fourth quarter market soundness report.

“With the successful issuance of the KMRC and Centum Real Estate bond issues this year (2022), there is growing interest in corporate bonds by domestic investors.”

Secondary market trading in this segment has traditionally been low, partly due to the higher interest rates offered on corporate bonds compared to government issuances.

In the last six months, however, government paper rates have gone up, touching highs of 14 percent on tax-free infrastructure bonds, which eclipsed the averages of 12.5 to 13 percent available on corporate bonds.

This, according to analysts, has enticed some commercial bondholders to liquidate their positions and instead put funds into the higher paying, risk-free government bonds.

The improved uptake of corporate bonds, both in the primary and secondary markets, also points to the increased awareness by investors of the potential of fixed-income assets as an alternative to other classes such as equities and property, which have been offering subdued returns.

As per CMA data, there are 1,910 corporate bond investors at the Nairobi Securities Exchange, of which 98 percent or 1,874 are local individuals or retail investors.

These investors hold corporate paper worth sh28.33 billion, equivalent to 95.6 percent of the value of all the outstanding issuances.

Turnover numbers are still some way behind the averages of four or five years ago when annual sales in the segment would touch Sh3 billion.

The collapse of Imperial and Chase banks in 2015 and 2016 soon after issuing corporate bonds, and the fall of retail chain Nakumatt with billions of shillings worth of outstanding commercial paper dues hurt investor confidence in the segment and pushed issuers to other alternatives such as private equity capital injections.

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