Rising interest rates is causing investors to shift to high yielding government bonds from the equities market, leaving potential companies seeking to raise new capital through the sale of shares to the public holding on for fear of undersubscription.
The Capital Markets Authority (CMA) disclosed that lucrative yields on government bonds, anti-finance bill 2024 protests by the Kenyan youth popularly referred to as Gen-Z in June, and the borrowing options granted by commercial banks have further convoluted the initial public offerings (IPOs) environment, leaving potential issuers with hard choices to make on their funding plans.
The latest have thrown potential issuers into a spin and left open the proposals for new listing in 2024, prolonging the more than 10-year wait for a full listing by a corporate entity on the Nairobi Securities Exchange (NSE).
“Initial public offerings (IPOs) are still on the table, but you see now where the interest rates are going. It is a choice; if I have money, do I give you when you are issuing shares or should I go for government bonds,” says Wycliffe Shamiah, Chief Executive, CMA.
“If I was to raise money as a private company, it is very unlikely that I would get people who give me money because those people would just put their money in government bonds.
"So that is the discussion the issuers will have and still they can opt to go for, of course for bank loans because for a bank may be you can negotiate for better rates.”
Three firms from the financial, food processing and mining sectors suspended plans to list on the bourse last year, fearing an adverse pricing of their shares as a result of the persistent bear run on the Kenyan bourse.
Companies usually prefer to go public in a bull market which allows them to sell shares at a premium valuation and enjoy a stable or rising paper wealth for their shareholders once they list.
The bonds turnover surged by 119.54 percent to Ksh176.21 billion ($1.36 billion) in the three months to June 2024 from Ksh147.41 billion($1.14 billion) in the same period last year ( 2023.) ,with treasury bonds constituting 99.99 percent of the market turnover compared to corporate bonds at 0.00005 percent according to CMA data.
Jimnah Mbaru, the chairman of the Dyer and Blair Investment Bank says the flight to safety by equity investors seeking better returns in the fixed income market is dimming the prospects of IPOs, a development that is being exacerbated by the fact that many companies now fear disclosures demanded by regulators as part of listing obligations.
Capital flight
“When you have high interest rates, the capital markets tend to fall behind. The capital markets and the stocks are not benefitting from this kind of situation.
"There is a capital flight from the equities to the fixed income and that has been the case for some time since the interest rates started moving up and it is tied up with this heavy government borrowing from the domestic market and the international market,” Mr Mbaru says.
“I think if they (capital markets) find any listing, it will be by default or extreme lack.
"When you see the capital markets being depressed it is a reflection of the state of the economy and when you see it becoming vibrant, it is a reflection of, sometimes, optimism and hope and even the initial government policies which are positive.”
The returns on investments in government securities for the week ended September 12 stood at 15.75 percent, 16.62 percent and 16.81 percent for the 182-day Treasury bills,364-day Treasury bills and 364-day treasury bills respectively, with long term treasury bonds attracting interest rate as high as 18 percent according to Central bank data.
“The only thing that is active now is the bond market and even on the bond market is just the government bond market, you don’t find corporate bonds which also says a lot of other things about our country,” says Mr Mbaru.
“There are also alot of challenges. You see the capital markets require a lot of transparency because to be listed or to be on the stock exchange you have to be very transparent but the way business is now being done, many players in the market require less and less transparency.”
Currently, there are 57 listed firms after five and four firms were delisted and suspended, respectively.
Property fund Ilam Fahari I-Reit has also been delisted after its owners voted to approve the market exit, according to CMA.
“We have seen companies that appear like they want to come to the market but it has not been successful. We have tried the government to do a bit of privatisation but it has taken quite long,” says Stanley Ngaine, chairman, Sterling Capital Ltd.
President William Ruto had promised to end the IPO drought on the NSE by listing about 10 State-owned corporations during his first year in office, but the plan is yet to materialise.
