Enock Wangila: Heightened Investor Risk Perception Thrusts Home Afrika’s Financing Cost
Property developer Home Afrika re-priced its 500 million corporate bond to make it Kenya’s highest paying coupon bond. The significant rise in coupon rate of the 5-year bond from 13.5% to 17% is set to increase the company’s financing cost with bondholders parting with Kshs 85 million in interest return at the end of the year as opposed to the initial figure of Kshs 67.5 million. Relative to a recent treasury issue of a similar term, the spread on the two securities is 3.5%, the highest interest spread in the market between a corporate bond and a treasury security issue.
The change in the Home Afrika’s coupon rate makes the corporate bond the highest interest paying security among all listed corporate bonds at the Nairobi Securities Exchange (NSE). The average coupon rate for corporate bond issues in the Kenyan market is 13% with recent issues by East Africa Breweries Limited (EABL) at 12.25%, Chase bank at 13.1% and Centum investments at 13% for fixed notes and 12.5% for equity notes of its bond issue.
The rise in coupon rate is attributed to a heightened risk perception of the investment by private bondholders who called for the rise. This was after the company issued a profit warning in early April of at least 25% reduction in profit. The issued profit warning was the second in a row after a similar issue was made last year with regard to the results for the financial year 2013 where profit declined by 25% from Kshs 108 million in the FY 2012 to Kshs 80.6 in the FY 2013.
The decision to offer a private bond placement instead of a public issue was as a result of under-subscription of the bond’s 900million issue made in December 2014. The company had initially made an application to the regulator for the public issue of the bond and had received the approval. However, the issue was unable to meet the minimal subscription amount of 500 million as was required by the Capital Markets Authority (CMA), making the property developer opt for a private placement of the bond using a local bank.
Home Afrika’s performance at the NSE has also been on a downward trend. The company was listed in 2013 in the Growth and Enterprise Segment (GEMs) of the NSE. The company’s share price has fallen from its initial listing price of Kshs 12 per share to trade at Kshs 2.90 as at this week’s closing share price.
Despite the current financial woes faced by the company, the management is optimistic of improved financial results in the year 2015. The company’s C.E.O expressed optimism of significant returns once the current infrastructure projects, causing a capital strain, are concluded.
Article by Enock Wangila.
Do you have an opinion on the business/economic environment in your country and wish to share your views with thousands of business professionals in Africa and international? Please contact andrea@africabusinesscommunities.com with your articles and blogs.