Tough CMA terms for bond issuers


Capital Markets Authority (CMA) Chief Executive Officer Wycliffe Shamiah. FILE PHOTO | NMG

Financially weak companies seeking to raise capital from the Kenyan corporate debt market must undergo mandatory credit rating and provide financial guarantees from recognised institutions such as banks and insurers.

The requirements are part of the latest legislative changes aimed at restoring investor confidence in the market battered by a string of defaults and corporate failures over the last 10 years.

The Capital Markets Authority (CMA), through a special issue of the Kenya gazette supplement No 204, seeks to cushion bondholders from financial losses arising from companies, which acquire approvals to issue bonds but end up defaulting or collapsing with investors’ funds.

Potential bond issuers are expected to have been in business for at least five years, must have declared profits before tax attributable to shareholders or owners in at least two of the last three financial periods preceding the application for the issue and its total liabilities, including the new issue of fixed income securities should not be more than four times the level of shareholder’s funds.

“Where the issuer does not satisfy any or more of the requirements… it may seek a credit enhancement to have the securities it seeks to issue guaranteed,” says the CMA.

“The guarantor may only be a bank or an insurance company or any other institution with necessary financial capacity acceptable to the authority, and a copy and terms of the guarantee document shall be subject to the approval of the authority.”

The minimum size of the bond issue shall be fixed at Sh400 million, with the minimum subscription set at Sh10,000 or such higher amount as the regulator may prescribe from time to time.

Under the new rules, companies seeking to issue bonds are required to procure the services of trustees to represent bondholders and appoint independent receiving banks that will hold investor funds in trust accounts until the securities are credited to investors’ CDS accounts.

“The issuer of debt securities may be rated by a credit rating agency licensed or recognised by the authority,” the rules state.

“A credit rating is not a recommendation to apply for the securities on offer or an assurance of performance of the offer or the issue, and investors should exercise due diligence and use the rating only as one of the considerations in making their investment decision.”

According to the gazette notice dated October 27, 2023, issuers and their directors are required to have demonstrated high degrees of integrity over the last two years devoid of criminal proceedings, bankruptcy and winding up petitions.

Their directors should not have been convicted of any crime in Kenya within the previous two years or been the subject of any ruling of a court, State agency or professional body, which disqualifies them from acting as directors or employees or professionals in the relevant field or engaging in business practice or activity in that jurisdiction.

Foreign companies seeking to raise capital from the Kenyan market will be required to provide certificates of no objection from the relevant regulators in their respective jurisdictions.

Since 2019, the regulator has been pushing for regulatory changes, which make it mandatory for issuers to have their creditworthiness rated by renowned agencies to protect investors from loss of funds.

The authority had borne the brunt of approving corporate bonds without carrying out thorough due diligence, putting bondholders’ investments at risk.

In 2015, Chase Bank and Imperial Bank received the CMA go-ahead to issue Sh4.8 billion and Sh2 billion worth of bonds, respectively, only for the two mid-tier lenders to be pushed into receivership in quick succession by the Central Bank of Kenya as a result of financial and corporate governance issues.

Several companies have in the past defaulted on their loan obligations in the corporate debt market. And with the lack of a clear compensation mechanism for the bondholders, investors’ confidence in the market is wanting. These included Nakumatt Holdings, ARM Cement and Real People. Nakumatt and ARM collapsed under a heavy debt load.

The CMA has since 2019 been seeking the support of the Kenya Deposit Insurance Corporation (KDIC) and the Central Bank to amend the deposit protection law to have cash invested in banks by fund managers through instruments like bonds separated from customer deposits and other bank liabilities to ensure that bondholders get paid when a bank collapses.

However, the plan has not materialised. The absence of a compensation scheme for bondholders who lose money in collapsed companies has instilled a sense of fear in the corporate bond market.

The Treasury bond market remains dominant, accounting for about 99.97 percent of the debt market on the government’s superior credit rating relative to private firms.

Corporate bonds account for 0.03 percent of the debt market after scores of firms settled their bonds and stayed away, preferring to raise funds from banks, shareholders and development finance institutions.

There are now only five corporate bond issuers whose securities amounting to Sh19.5 billion are listed on the Nairobi Securities Exchange (NSE).

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