Home Afrika pays high premium after investors shun bond

Buyers of Home Afrika’s corporate bond have re-priced the interest rate on the securities to 17 per cent, significantly raising the real estate developer’s finance costs from the initial coupon rate of 13.5 per cent.

At 17 per cent, the interest rate is the highest of all the corporate bonds currently listed on the Nairobi Securities Exchange by Kenyan companies, reflecting investors’ relatively high risk perception of Home Afrika’s debt instruments.

Centum recently issued a bond at a coupon rate of 13 per cent, Chase Bank has one at 13.1 per cent while the highest of all the bonds listed at the NSE is Consolidated Bank’s 13.6 per cent.

Home Afrika had sought to raise Sh900 million through a bond sale between November 27 and December 10 last year, but did not hit the minimum subscription level of Sh500 million for the issue to be deemed a success.

The company subsequently raised Sh500 million from bondholders in a private placement, receiving most of the cash from investors who had subscribed to the first bond issue which was terminated.

“It was largely the same investors who participated in the private placement. We gave them a higher interest rate,” said Home Afrika’s chief executive Njoroge Ng’ang’a in an interview.

READ: Home Africa raises Sh500m from bank after bond issue fails

The real estate company’s five-year bond is priced 3.9 percentage points above the latest government paper of a similar tenor, making it the highest spread between a corporate bond and treasuries. The company says the bond is partially secured by one of its parcels of land in Kiambu.

Home Afrika is now expected to pay about Sh85 million interest to the bondholders in the first year, compared to about Sh67.5 million if the rate was at 13.5 per cent.

“Interest on the corporate bond is at 17 per cent per annum payable semi-annually in arrears,” the company says in its latest annual report.
The securities, issued in denominations of Sh100,000, are redeemable in part or full after December 2017.

This means that Home Afrika can retire all or part of the debt before the maturity on December 16, 2019.

The property developer has reviewed its capital expenditure plans after receiving Sh400 million less than it had earlier expected.

The Migaa housing project in Kiambu, which was to be the main beneficiary of the bond money, has been allotted Sh400 million while Sh50 million each goes to Llango Development in Kwale and Lakeview housing project in Kisumu.

Home Afrika had planned to allocate Sh750 million to Migaa, Sh100 million to Lakeview Heights and Sh50 million to Llango.

The money will be used for infrastructure development in the various estates. Mr Ng’ang’a said the investments will generate “significant” returns once they are completed.

The property developer has, however, recorded reduced earnings, reflecting the capital-intensive nature of its business model with long-term payoffs.

Its net profit dropped 89 per cent last year to Sh8.9 million compared to Sh80.6 million the year before. Home Afrika attributed the performance to higher costs and delayed receipt of the bond cash that affected its projects.

“The group had sought such funds earlier in 2014 which were delayed for various reasons. It is management’s view that had these funds been received earlier, the operating results and cash generation would have been significantly better,” the firm said in a statement.