Regulator moves to end corporate bond drought

The Capital Markets Authority (CMA) is working with credit agencies to address the current “unrealistic pricing” of government bonds that it says have crowded out corporate investors. This is among the steps that the capital markets regulator has embarked on to restore confidence in the corporate bond market that is running dry owing to a bad history of loss of investor money. In the last five years, at least five big firms that had floated corporate bonds – including at the Nairobi bourse – have collapsed, causing agony to investors and heavily reduced appetite for the debt instrument. Chase Bank, Imperial Bank, ARM and Nakumatt are some of the firms that have sunk after they issued corporate bonds. Others are having problems repaying, including Consolidated Bank and small and medium enterprise lender Real People. However, CMA didn’t regulate the Nakumatt commercial paper as it was under private placement, meaning investors were unsecured and hence can’t claim anything. Investors have, in turn, turned to government bonds due to their low risk and attractive returns. “Government bonds offer attractive returns of more than 10 per cent and hence crowd out corporate bond potential investors,” said CMA. “CMA is working with relevant stakeholders including credit rating agencies to address the current unrealistic pricing of government bonds despite their very high rating as risk-free assets.” Other measures by CMA meant to restore investor confidence include credit enhancement and the use of guarantees in issuance. “We are working on a multi-pronged approach under our market deepening strategy targeted to restore investor and issuer confidence in the capital markets. Key among them is encouraging issuers to consider credit enhancement and the use of guarantees in their issuance,” said CMA. The regulator said it is working closely with other State entities including the National Treasury, Attorney General, Central Bank, and Kenya Deposit Insurance Corporation to review laws that support true insolvency netting, settlement finality and segregation of assets held under custodial arrangements from bank deposits. The regulator said it is encouraging issuance of credit-linked notes or credit default swaps as special corporate bonds with covered risks. “Further, CMA is designing mechanisms to ensure issuers are more accountable on use of proceeds following capital raising, through continuous monitoring and evaluation,” it noted. “A draw-down approach where corporate bonds are only funded by investors based on the stage of project completion is also being encouraged.” Most of the […]

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