Kenya’s Capital Markets Authority (CMA) is working on new measures to revive the troubled corporate bond market that will see companies with weaker balance sheets forced to acquire bank guarantees to protect investors’ interest in the event of default.
The market regulator is seeking ways to deal with credibility issues that hit the corporate bond market after the collapse of issuers such as Chase Bank, Imperial Bank, Nakumatt, and cement maker ARM without a clear-cut compensation mechanism for bondholders.
Under the proposed measures companies seeking to issue bonds will be required to undergo financial due diligence with those having weaker balance sheets forced to acquire guarantors from banks or other financial institutions to protect the investors’ savings.
In addition, companies, particularly those issuing asset-backed securities will have to undergo credit rating for their risk positions to be well captured.
“On protection of investors, two initiatives are on the table. One is to encourage credit rating of the issuances so that the risk position is captured to help investors decide on whether to participate. Second, credit enhancement at different layers. For instance, one could get a guarantor to support either the principal amount or partial as well as the interest payment,” the authority’s CEO Wycliffe Shamiah told The EastAfrican last week.
Integrity matters
“Enhancement could be through collaterisation where issuers’ specific assets may be set aside to cover potential default. However these considerations depend on the strength of the balance sheets of those interested in issuing the bond. If solid and reputation is high, the risks are less. Usually guarantors would be banks, other financial institutions, and related companies or those specialised in the business of guaranteeing such as Guarantco.”
Kenya’s corporate bond market is gasping for breath after a string of defaults dampened investor confidence in lending to companies.
CMA data shows that Treasury bonds dominate the market, accounting for 99.92 per cent of the debt market, with corporate bonds at a paltry 0.08 percent.
Kenya has six listed corporate bonds valued at Ksh9.88 billion ($92.33 million) after the Chase Bank bond valued at Ksh4.82 billion ($45.04 million) was suspended from trading after the lender was put into receivership in April 2016.
Investors have lost confidence in the market due to the high default rates by companies on their loan obligations and failure to compensate bondholders once financially distressed firms go under.Regionally, the corporate bond markets are not doing well either.Rwanda has had two corporate bonds listed on the […]