SPVs ‘the best option to develop infrastructure’

The CBK recommendation comes from it’s evaluation of the recently concluded infrastructure bond that was oversubscribed but which ended up with a higher-than-market yield.

The bond attracted a yield of 13.5 per cent at the issuing stage but has subsequently been trading at less than that owing to high demand in the secondary market.

With more subscribers issue would probably have been cheaper for the government.

“Future bonds shall be issued specifically under the Capital Markets Authority (CMA) Asset-backed securities regulations. Projects will be funded through issuance of bonds by special purpose vehicles (SPVs), with receipts being the primary source of repayments,” said the report produced under the direction of Mr Jackson Kitili, the director of monetary operations and debt management department.

An SPV is divided into many shares – in the form of receipts – which are then sold to investors who expect an income from the cash flows of the entity.

The success of the infrastructure bond was a critical step towards allowing government agencies, parastatals and municipalities to raise money from the local capital market to finance infrastructure projects.

The bond raised about Sh27 billion against a requirement of Sh18.5 billion but many investors asked for higher than market returns.

However, the CBK stressed that the Government now expects the agencies or issuers to service the bonds from incomes generated by those projects as opposed to the government selling the infrastructure on the basis of its creditworthiness. Each issuer will pay from its own cash.

“This by implication means that the bonds will be structured alongside the balance sheets of the issuers and the projects will be structurally self-financing. This will enhance transparency and accountability in the management of long term public funds,” said the report.

It added that “the Capital Markets Authority should engage in intensive and extensive investor education and awareness campaigns to sensitise existing and potential investing public on the various financial instruments available and how they are traded.”

Mr Kabaki Wamwea, executive director for fixed-income securities at Dyer & Blair Investment Bank, said that it should be possible even for public entities to isolate the parts of their organisations that have good cash flow and then use this to set up SPVs to specific projects.

Asset-backed securities

“It is possible, for example, for the City Council in Nairobi to isolate parking fees or land rates as cash flow for a project such as building more parking lots. It can then use the proceeds from parking fees to pay those who would have participated in the SPVs as investors,” said Mr Wamwea.

In developed markets, SPVs administered through issuing asset-backed securities to investors have been used extensively.

The SPV is formed as a separate entity from the sponsoring company.

Even though the sponsoring firm is broke, if it has a well-funded SPV it can still attract investors who are able to identify clearly the source and reliability of the cash flows.

“The balance sheet of the company forming the SPV may not be strong but the new entity could still have adequate cash flows to repay investors who participate,” said Mr Wamwea.
A major problem in urban centres in Kenya is the rapid growth of slums.

A UN-Habitat document titled Improving Access to Domestic Capital for Slum Upgrading and Low-Income Housing Projects recommends SPVs as one of the options available for financing housing projects in slum areas.

It recommends that a Property Unit Trust – in which investors’ funds are pooled – “be explored as a methodology to facilitate pension fund investment in SPVs and that the possibilities to do so be examined.”