Strong rating for Sh5bn hostels bond puts the shine on real estate projects

The strong rating of real estate developer Acorn Group’s Sh5 billion green bond intended to finance the building of student hostels has put a shine on the investment class that is driven by increased college enrolment, which has outpaced the building of accommodation in universities.

Global ratings agency Moody’s has given the bond a B1 rating, placing it higher than the Kenyan government’s sovereign rating of B2 stable.

The rating is a stamp of approval for the bond issuers, British real estate developer Acorn and private equity fund Helios, despite the risk of corporate bond defaults in Kenya and uncertainties around the property market.

The bond will be guaranteed by the A-rated GuarantCo, backed by the governments of the United Kingdom, Australia, Sweden, Switzerland and the Netherlands as well as Acorn Holdings Limited (AHL), which will give a corporate guarantee.

College student enrolment has risen sharply from about 112,000 in 2006 to more than 500,000 last year, according to Kenya National Bureau of Statistics data. Building of student accommodation has, however, lagged way behind enrolment, a situation that has seen some students seek cheap accommodation near the campuses where they study.

Acorn and Helios target to build up to 3,800 university hostel units in Nairobi at a cost of about Sh7.4 billion. They have already put up more than 1,000 units in Ruaraka, Jogoo Road and Parklands under the Qwetu brand. Acorn has offered to waive immunity over its assets in the event of a default as it built layers upon layers of insurance to the investors of its bond.

“To the extent that the issuer may in any jurisdiction claim for itself or its assets or revenues immunity from suit, execution, attachment… the Issuer agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction,” the Information Memorandum read. Another layer of comfort will be a debt service account funded with three months interest and an assignment of rental income towards payment of the debt.

The investors will also hold a first ranking charge on land and a floating charge over all the assets of the issuer to safeguard their interests. This is the first time such guarantees are being offered with Moody’s admitting that enforcing them has not yet been tested. “Ratings also reflect, however, the following credit challenges including Kenya country risk, and relatively new and untested frameworks for the protection of creditors rights,” Moody’s said.

International investors have shunned Kenya’s corporate bond market following several defaults by issuers where billions have been lost.

According to the Capital Markets Soundness Report for the second quarter of 2019, local corporate bond investors were holding 99.33 percent of amounts outstanding as at the second quarter while foreign bond investors held 0.67 percent of total corporate bond holdings.

This is after bonds risks rose following placement of Imperial Bank under receivership that froze a Sh2 billion bond and a few months later, Chase Bank went under with a Sh4.8 billion bond (see related story on Page 12-13).

Cement maker Athi River Mining defaulted on a privately-placed unsecured bond in June 2018 and was subsequently put under administration while Nakumatt was also put under administration, which means the bonds and commercial papers they issued cannot be redeemed.

Real People wants to postpone repayment of its Sh1.3 billion bond to 2028 while Consolidated Bank pushed repayment of the Sh1.6 billion bond by three months.

In 2016, TransCentury was unable to pay back its Eurobond, forcing a restructuring through Kuramo Capital.

Moody’s says that the favourable rating was given as a result of project finance protections, including restrictions on the issuer’s business activities and distributions, limitations on additional debt and a Noteholder security package comprising charges over the assets, land, accounts and shares.