Since the successful issue of the Sh25 billion KenGen #ticker:KEGN public infrastructure bond in 2009, the local corporate bond market has yet to scale back to the same heights.
Beset by collapsed issuers and defaults in recent years, the segment seems to have taken a backward step in active issuance of corporate bonds as investors who pumped their money in the two problem issues by Chase and Imperial banks still seek recourse on their outlays.
Most of the issuers redeemed their bonds and opted for alternative sources of funds including loans from banks, shareholders, private equity and development finance institutions.
As at the end of December 2020, there were only six outstanding commercial papers valued at Sh19.1 billion, according to the Capital Markets Authority’s quarter one 2021 statistical bulletin.
This was a marked drop from 20 commercial papers valued at Sh61.9 billion as at the end of 2018.
Corporate bond turnover as a percentage of the Nairobi Security Exchange’s #ticker:NSE total bond turnover also stands at a negligible 0.08 percent compared to 99.92 percent for Treasury bonds.
Against these odds, the recent success of the Sh4 billion (first tranche of a Sh8 billion total programme) Family Bank bond shows the market's enduring resilience.
Family Bank’s return to the corporate debt market soon after redeeming a Sh2 billion bond in April proves that investor confidence has recovered.
The offer follows the equally successful issuance of the Sh4 billion corporate bond in November last year by Centum’s #ticker:CTUM real estate arm. Altogether, the two issues bring the total of investment-grade bonds trading on the NSE to four—with the other two being East African Breweries Limited’s #ticker:EABL Sh6 billion paper and Acorn’s Sh7 billion bond.
The big question is whether we will see more companies enter or re-enter the corporate bond market, especially commercial banks and financial institutions that are traditionally the most popular issuers of such papers.
There are various reasons why we need a booming corporate bond market. First of all, it has been argued that overreliance on bank lending for debt financing exposes an economy to the risk of a failure in the financial system.
The implication is that a banking crisis can adversely affect economic activity and companies would, therefore, find themselves credit-constrained and hence be forced to abandon investment spending.
Secondly, with lending to the private sector dwindling, an alternative to bank credit is much needed. At Sh2.86 trillion in March 2021, credit to the private sector accounted for 65 percent of the total net domestic credit, down from 70 percent a year ago.
It is worrying that the market expects that the same trend will continue in view of rising non-performing loans (stood at 14.5 percent of gross bank loans as at December 2020, up from 12.5 percent in December 2019) and banks’ preference to lend to the State through government securities.
We can only hope, therefore, that the “sick child” of the capital markets is finally back.
As the Central Bank of Kenya (CBK) and the capital markets regulator work at resolving issues surrounding the Chase and Imperial Bank bond issuances, the resurging presence of an active corporate bond market is a welcome change.
Mr Mwanyasi is the managing director at Canaan Capital
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