Consolidated Bank seeks Sh1.6bn bailout after default

Consolidated Bank of Kenya is seeking the Treasury’s bailout to repay holders of its Sh1.6 billion corporate bond that was due for redemption Monday.

In a statement, the bank offered to pay investors three months after Monday’s maturity date, when it hopes to have received a cash injection from the Treasury. Consolidated Bank is 85.8 percent owned by the State.

“The proposal for extension of the maturity date has been made in consultation with, and in full support of the National Treasury, the majority shareholder. The extension is necessary to allow National Treasury to finalise the process of capital injection into the bank,” said the lender.

The bond default raises queries on the financial position of the bank, even as chief executive Thomas Kiyai declined to comment on the matter Monday.

The missed payment also underlines the continued fragility of the corporate bond market that has seen investors suffer losses of more than Sh13 billion from several issuers of the debt instruments in the past few years.

The Nairobi Securities Exchange (NSE)-listed Kenya Re, which bought Consolidated Bank bonds worth Sh100 million, is among the institutions that are exposed to the State-owned lender. Another firm, Centurion Holdings, invested Sh154.7 million in the corporate paper.

Ownership of the bonds could have changed since the securities are listed on the NSE where they were tradeable.

The bank defaulted on the same day that insurer UAP Holdings redeemed its Sh2 billion bond using new loans.

Consolidated Bank in July 2012 issued a series of the debt securities –senior notes paying fixed interest rate of 13.5 percent and subordinated notes yielding 13.25 percent.

The statement did not say how much new capital it expects to receive from the government.

Consolidated Bank joins a list of corporate bond issuers that have defaulted or restructured their debt, roiling a market segment that has continued to shrink on the back of investors’ loss of confidence.

Asset managers, insurers, pension funds and individual investors have lost billions of shillings from buying the debt instruments that offered slightly higher rates compared to risk-free government bonds of similar maturities.

Retail chain Nakumatt Holdings remains the biggest defaulter, having collapsed with unpaid commercial papers amounting to Sh4.7 billion.

Chase Bank also went into administration of Kenya Deposit Insurance Corporation (KDIC) in 2016 after raising Sh4.8 billion from the bond market.

The lender was later acquired by Mauritius’ SBM Holdings, which did not inherit the liabilities, leaving the bondholders in limbo.

Imperial Bank also collapsed in 2016 soon after issuing a Sh2 billion bond. KCB Group is buying part of Imperial Bank’s assets and most of its toxic liabilities, including the bond, are expected to await resolution by KDIC.

ARM Cement went into administration last year after defaulting on its creditors including bondholders claiming a total of Sh1 billion.

Microfinance firm Real People last year defaulted on Sh1.2 billion worth of bonds and sought to convert the debt into equity.

Insurance firm Sanlam Kenya was one of the biggest casualties of the rising credit risk in the corporate bond market, with the NSE-listed firm writing off Sh1 billion of its investment in the debt instruments.

The string of defaults has seen the corporate debt market shrink considerably as investors remain spooked and companies seek to avoid paying much higher interest rates to reflect the now much-publicised credit risk.

East African Breweries Limited (EABL) was the last to issue a five-year bond in April 2017 when it raised Sh6 billion at a fixed interest rate of 14.1 percent, the highest yield of all the outstanding issues.

Most of the companies that have successfully redeemed their bonds have not come back to the market.

They include banking group I&M Holdings which settled its Sh3.6 billion bond in March, mortgage financier HF Group (Sh7 billion pain in 2017) and Centum Investment Company (Sh4.2 billion settled in 2017).