Friday, October 26, 2007

BBK's bond-interesting pricing

BBK's impending floatation of its overdue Ksh5bn bond has not elicited as much excitement as I thought it 
would. This is an overdue and welcome development in the financial market and especially so if we are to develop infrastructure funding. BBK plans to draw down on the facility in three tranches with the first Ksh1.5bn  due to be on offer from Monday; Ksh2bn in May and Ksh1.5bn in 2009. The pricing sparked this post because i think its a missed
opportunity for BBK and a puzzle. As far as I can see, its really to entice investors who will always be able to
 make a little bit change over the prevailing interest rates .

A s a shareholder, one should see it s a missed opportunity. Why? What direction will interest rates take over the next 7 years? One small winnable bet is that they won't be that lower than they are now. 

So the way to go would have been to fix the interest rates for each tranche and space them out a little bit more. 

In the short-medium term, one of the biggest concerns of our growing economy is the adverse impact inflation is having on consumer expenditure. The current inflation's causes are three fold, money supply, fuel prices and supply bottlenecks caused by poor infrastructure. Money supply is a short-term issue and can be fixed by raising interest rates (in Kenya, this is still done by GoK going to the market), fuel prices is both medium/long term issue with short-term fixes (price controls, but I think this will be heavily fought by the oil-business which is already suffering from last year's tax changes ) and medium fixes being increasing capacity for Kenya Pipeline and long-term, signing contracts with our EA colleagues. 

 If GoK was to raise interest rates then its quite conceivable that borrowing would fall and with BBK's bond tracking the higher rate, BBK would find itself with a liquidity shortfall. And vice versa.  Thus, a fixed rate would have meant that a period of higher interest rates would see some good upside for BBK. Secondly, its actually easier to offer long-term fixed mortgages if your funding costs are also fixed. For those investing in housing on a fixed product, one can borrow against the incoming rental income with some certainty.


muna said...

I agree with what you are saying about the ill-advisedness of doing a floater. But do you believe any one would take fixed rate beyond 91 days in the current political atmosphere? You do not know whether the impending changes entail massive deficit financing to right the said imbalances and extravagances we are hearing of from the campaign trail.
To me, a floating rate is the deal more so when seven years span a potential three regimes.

Ssembonge said...

Maina, don't overlook the forex impact when investing in Kenya. Just saving your pounds in a UK savings account might over-perform buying bonds in Kenya. 7 years from today the shilling may be worth over 200 to the quid. i think the pound is one of the strongest currencies.

MainaT said...

Firstly, apologies for the lack of editing on the post.
Muna-Its an excellent and innovative product for bond investors (e.g. pension schemes, companies that operate overdraft etc). However, looking at it as a BBK shareholder, given that it had three tranches, the only reason I can think for the pricing is the political angle as you mention and perhaps fear of undersubscription given Safcom imminent's OFS. As a minimum its Ksh100m+ per year interest charge that will rise over time.
Ssem-I personally won't put money in a bond unless it offered 12%+ per year because even LSE can give me that.