What we learnt from EABL bond issue

Our capital market is crying out for quality grade A corporate bond issuers as an alternative to lending to the sovereign. This, to me, is the biggest lesson from the hugely successful East Africa Breweries Plc’s #ticker:EABL Sh 11 billion medium-term note, which was oversubscribed by 345 percent.

This note was by far the company’s most successful capital-raising exercise. The fact this level of success can be achieved in the context of a once-in-a-lifetime pandemic itself speaks volumes on the depth and liquidity of our capital markets.

We saw from the results of the issue that nearly Sh30 billion that was looking for a home had to be returned to the owners. Clearly, the market is saying that it has the capacity to take more and similar grade A corporate issuers. We must all pray that the success of this issue will open the door for other corporates to follow suit. Indeed, the markets have been going through an unprecedented dearth of new issues.

Deep, liquid and well-functioning capital markets are a critical component of a diverse economy. Indeed, the lack of well-developed capital markets is one of the biggest constraints to development in most sub-Saharan economies.

The second lesson I found significant from the hugely successful issue is the following: The huge response has once again demonstrated the importance of having domestic commercial banks with world-class syndication capabilities.

Absa — the lead arranger for the issue — was well placed to deliver because when you are part of an international network of well-capitalized subsidiary companies, you are in a better position to easily place any amounts exceeding domestic capital limits within your network.

In retrospect, that spat with the media where it was alleged that Absa had breached single-borrower limits in its past lending to EABL only arose because that conversation underplayed and gave inadequate significance to the syndication capability and muscle that sits in a domestic bank that is part of a network of international subsidiaries such as Absa.

The success of the media term note has also offered lessons in trends happening in the broader economy. Successful capital issues are what will reinvigorate expansion and private sector investments.

The picture you see as you scrutinise numbers more closely is that business investment in Kenya has reached a lower plateau. Without a doubt, there has been some investment going on in the economy. But most of it has been by the government and in unproductive sectors of the economy.

We are at a point where policy must now focus on supporting big tax-paying manufacturers like EABL who in reality are the ones capable of playing the role of the main engines of economic recovery.

The beer giant has been on the list of top taxpayers for years. Even as the private sector went through a structural transformation that has seen two sectors — telecommunications and financial — becoming dominant, the beer maker has retained its top position among the few who bear a disproportionate share of what the Kenya Revenue Authority receives in corporation tax.

Methinks it’s time we started a robust national conversation around the phenomenon of the compliant few. Just the other day, the Kenya Bankers Association produced findings of a study that showed that the commercial banking sector alone accounts for 35 percent of the corporate tax collections by the KRA.

The situation begs the question: Considering that the banking sector accounts for only five percent of GDP, why is it that it is made to contribute to such a large proportion of corporate tax collections? Where are the others?

I have digressed. According to EABL, the funds raised from the issue will be used mainly to finance investments in expanding production, repay debts taken in the ordinary course of business and refinance short-term borrowings. The message the listed beer maker has sent to other resident multinationals is clear: you can tap capital in Kenya and deploy it regionally. You don’t have to cross-list.