The interest charges on listed brewer EABL’s shilling denominated loans went up by up to five percentage points in the year to June 2024, reflecting the sharp rise in the 182-day Treasury bill rate on which the loans are pegged.
Companies have identified higher financing costs as a major concern this year, with the EABL loans rate increase highlighting the impact of the government’s willingness to pay more for domestic debt to plug its budget deficit.
EABL’s annual report for 2024 lists a total of eight loans valued at a cumulative Sh22.4 billion that are pegged on the six-month T-bill, one facility worth Sh3 billion pegged on the central bank rate and another loan of Sh1.26 billion that carries a fixed rate of nine percent.
The company also carries an outstanding medium-term corporate bond of Sh11 billion, which has a fixed rate of 12.25 percent.
On eight of the T-bill pegged loans, the company pays a premium of between 1.5 percent and 2.45 percent on top of the prevailing rate on the short-term securities.
These loans were a major contributor to the 49 percent increase in EABL’s net financing costs to Sh8.17 billion in the period despite a reduction in overall debt. This was because their applicable interest charges went up in tandem with the rise in the 182-day T-bill rate from 11.86 percent at the end of June 2023 to 16.73 percent in June 2024.
“Although our borrowings reduced by 13 percent, cushioning us against the full impact, the increase in our effective cost of debt from 12.5 percent in the 2023 financial year to 15.1 percent in 2024 still had a material impact on our results,” said EABL in the annual report.
“Total debt for the group reduced by Sh11 billion from Sh59 billion as at June 30, 2023, to Sh48 billion as at June 30, 2024 as a result of our debt management strategy, through which we facilitated the repayment of certain borrowings to cushion against the impact of rising interest rates.”
The 182-day T-bill rate hovered between 6.5 percent and 11 percent from March 2016 to July 2023, when it began to rise to the current rate of 16.63 percent as investors in government securities demanded more returns due to perceived increased risk of default by the government.
Lenders, in turn, looked to peg their corporate or sovereign loan rates to the risk-free rate on government securities in order to protect themselves from losing their margins when the cost of funds goes up as they compete with the Treasury for private sector deposits.
Banks normally take a number of rates into account when pricing their cost of funds, including the T-bill rate, the CBR and the interbank rate.
The main source of funding for banks comes from customer deposits, but they also access facilities from other lenders, the Central Bank of Kenya (CBK) and international financing institutions.
