Kenya's bond market slowing despite improvemnts

The country’s bond market is the third-largest in sub-Saharan Africa after those of South Africa and Nigeria, with a trading volume of $70m-100m a day. However, during 2015 secondary trading has been slowing, largely due to changes in the economic environment and the lure of soaring interest rates for short-term debt instruments in the second half of the year. The slowdown comes despite the Nairobi Securities Exchange (NSE) making giant strides in improving transparency and efficiency in the trading of Treasury and corporate bonds. Ultimately, Kenya’s persistently high interest rates and growing economy are likely to continue to attract global and local interest.

Automatic Traders

In September 2014 the NSE and the Central Bank of Kenya (CBK) jointly launched an automated trading system (ATS) for the NSE’s fixed-income securities segment. The system was built by South African software firm Securities Trading & Technology, which also supplied the Johannesburg Stock Exchange’s bond trading platform. Most African bond markets still trade in the less regulated over-the-counter (OTC) market, the preferred venue for banks and other big traders.

The system is integrated with the Real-Time Gross Settlement system under the CBK’s Kenya Electronic Payment and Settlement System. It offers true delivery-versus-payment to mitigate risk. The NSE increased the number of daily settlements for Treasury bonds to three per day, and a bond trader can buy a Treasury bond and sell it the same day. The ATS follows South African practice and quotes bonds by yield to maturity. It supports market making and a two-way quote trading model. OTC trades can be reported for settlement and the system can integrate with regulators’ surveillance systems. It also supports trading in bonds in different currencies.

In July 2015 the NSE amended its trading rules for fixed-income securities and how they interact with the trading system. Geoffrey Odundo, CEO of the NSE, said this could lead to more diverse debt securities, including senior unsecured fixed-rate notes and equity-linked notes. Paul Muthaura, acting CEO of the Capital Markets Authority (CMA), called for more improvements, saying, “I would urge the National Treasury to continue spearheading the consolidation of the two domestic central securities depositories as we position ourselves towards integrating the capital markets infrastructure within the EAC.”

New Issues 

Investor interest in primary issues was strong for the first part of 2015. In January 2015 Commercial Bank of Africa listed a KSh7bn ($77m) medium-term note, which was oversubscribed by 40%. The listing exercised a KSh2bn ($22m) greenshoe option, allowing the underwriters to sell investors more shares than originally planned. This was followed in March by East African Breweries’ issue of KSh5bn ($55m), which was oversubscribed by 81%. In May the CMA approved the issue of a KSh6bn ($66m) medium-term note by Centum Investment Company to fund new investments in power plants and real estate. It attracted bids worth over KSh8bn ($88m), and allowed separate listing of the bond and its equity-linked component. May 2015 also saw Chase Bank launch a seven-year KSh10bn ($110m) multi-currency corporate bond to strengthen its capital base and finance expansion, and the first KSh3bn ($33m) tranche was also oversubscribed, with the issue exercising a KSh1.8bn ($19.8m) greenshoe option.

In July microfinance lender Real People opened a KSh2.5bn ($27.5m) issue of five-year and threeyear fixed-rate notes, but only attracted KSh1.6bn ($17.6m) in bids. Then, in August, Imperial Bank offered KSh2bn ($22m) in a 15% bond maturing in December 2020, but on October 13, the day it was supposed to start trading, the CBK announced that it was placing Imperial Bank under statutory management for “inappropriate banking practices”, and the CMA immediately suspended the listing and trading.