Strathmore University Seminar: Kenya as an Emerging Market

Strathmore University Seminar: Kenya as an Emerging Market
“Using the Capital Markets to Finance Kenya’s Infrastruture”
Presentation by: Evans Osano – International Finance Corporation
Date: 7 th September 2007
Hotel
Venue: Nairobi Hilton

Agenda
Introduction:
What a Bond Market can do for Kenya
Current Status of Kenya’s Bond Market
Challenges to Bond Market Development
IFC’s Role in Bond Market Development
2

An Introduction to IFC
• Private sector arm of the World Bank Group
• IFC fosters sustainable economic growth in developing countries by:
• Financing private sector investment
• Mobilizing capital in international financial markets
• Providing advisory services to businesses and governments
• Largest Multilateral source of debt and equity financing in the developing world
3

IFC and Infrastructure
IFC works with governments and the private sector to:
• Improve bankability of infrastructure projects
• Increase private sector participation in infrastructure projects
IFC services
• Sector reform & regulatory policy advice (in conjunction with World Bank)
• Advice to governments on packaging and presenting deals
• Early stage risk capital and advice to project sponsors
• Project finance for PPPs and private infrastructure
IFC operational goals
• Increase number of fully financed & robust private infrastructure projects
• Improve access to basic infrastructure services for Africans
4

Introduction
Africa’s infrastructure financing needs estimated at US$250 billion in the next 10 years.
Unmet infrastructure and housing needs hamper economic growth and poverty reduction.
Bulk of infrastructure undertaken by the public sector using foreign currency loans.
Private Sector can contribute in bridging the financing gap.
Local financial institutions have limited capacity to finance infrastructure.
Capital Markets can be used to raise long-term local currency financing for infrastructure.
5

Introduction - Financing Instruments
Equity Finance – Long-term capital provided in the form of shares, signifying part
ownerhip in the company.
Private Equity – Common with greenfield projects.Institutional Investors make private
equity placements with individual project companies.
Project Finance - Subordinated Debt (Quasi Equity/Mezzanine Finance) – Unsecured
finance that is senior to equity but junior to senior debt: May allow participation in the
upside potential of an equity position.
Bond Markets - Local Currency Project Bonds.
6

Bond Markets – Benefits of a Bond Market to the Real
Sector
Expanded housing finance
Improved infrastructure finance
Improved risk management for borrowers i.e.
• Lower interest rates
Builds infra-structure
• Reduced foreign currency risks
Roads; hospitals; schools etc
• Reduced refinancing risks
Improved productivity leading to lower
Improved yields for institutional investors inflation
Increased financial sector diversification Provides future growth for pension
investments, mortgages and other
Accelerated private sector development
investment opportunities
This creates employment
7

NSE Listed Instruments – As at 30 June 2007
Number
Mkt Cap
Mkt Cap
Turnover
Turnover
Listed
(US$M)
(% of GDP)
(US$M)
Ratio
Equities 54 11,800 43% 628 43%*
Treasury Bonds 68 4,100 16% 606 30%
Corporate Bonds 6 61 0.2% 0 0
*Based on estimated 25% free float market cap, Turnover for 6 months of 2007, Ratio annualized
There are only 6 listed corporate bonds in Kenya – one is fixed rate
Only Telcoms have made significant use of the markets in the past (Safaricom & Celtel)
In 4 years corporate bonds have recorded turnover of only US$82,000 – buy and hold
strategy of institutional investors, small size of issues, structure of issues (floating rate)
8

Status of Bond Markets – Yield Curve
YC, QKEBMK= Realtime
15Y, 12.7
YC, QKEBMK= Historical(2007/01/26)
11Y, 14.63
Yield
14.5
14
13.5
13
12.5
12
11.5
11
10.5
10
9.5
9
8.5
8
7.5
7
6.5
6
5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
Cash 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 15Y
Source: Reuters Limited
Yield Curve extended to 15 years – but relatively steep.
Study needed to estimate the long-term inflation expectations in Kenya.
CBK could consider issuing inflation-linked bonds.
9

Bond Markets – Ingredients for a vibrant bond market
• Macro environment
• Legal environment
• Tax environment
• Borrowers with bankable projects
• Informed investors
• Market structure in terms regulation and participants
• Borrowers, lenders and intermediaries
10

Bond Markets – Challenges to a vibrant bond market in
Kenya
Legal and regulatory environment
• Asset Backed Securities regulations – to facilitate securitization
• Approval process – It takes long to approve issues (up to 9 months)
• Merit versus disclosure based approval regime debate
• Issue costs – need to rationalize
Secondary Market
• Market Strucure
• OTC markets – 95% of bonds traded in OTC markets globally
• Settlement risk in a non-DVP environment
•Electronic trading platform for bonds
•Information Assymetry – Price reporting, yield curves and bond indexes
11

Bond Markets – Challenges
Lack of instruments
• Currency mismatch – most infrastructure projects financed by foreign currency loans
which carry significant currency risk (e.g East African Portland Cement)
• Utilities – Foreign Currency risk passed on to consumers (KPLC and KenGen)
• Asset/Liability mismatch – When local banks lend long using short-term deposits
Project Preparation Gap
• Lack of packaged and bankable projects (financial viability from standpoint of financiers)
• Weak subnationals (State Owned Entreprises and Municipals) – limited ability to issue
bonds without government guarantees.
• Limited private sector participation in infrastructure development
• Capacity of local intermediaries, investors as well as issuers
12

Role of Pension Funds in Kenya
Size of Industry estimated at
US$3.5 billion and growing at
US$200 million p.a
Pension Funds are natural
investors in long-term assets
(Account for 21% of T-bonds)
60%
50%
40%
30%
20%
Pension Funds Investments (%) in Asset Classes 2001-2006
Government
Securities
Other Fixed
Income
Quoted
Equity
Property
Private
Equity
Other
…..However are risk averse,
but increasing investments in
equities questions this.
10%
0%
2001 2002 2003 2004 2005 2006
Data Source, RBA
13

IFC’s Role in Bond Market Development
14

ESMID Africa – Program for fostering securities
markets development in Africa
ESMID:
• Efficient
• Securities
• Markets
• Institutional
• Development
A partnership between:
• Swedish International
Development Cooporation
Agency (Sida(
Sida)
• International Finance
Corporation (IFC)
• World Bank
Foster the development of well functioning securities markets in Africa
Improve ability to finance infrastructure and housing development through bond markets
15

Countries
• Kenya
• Uganda
• Tanzania
•Rwanda
East Africa
(Regional Approach)
•Nigeria
Country Approach
ESMID will largely work with clusters of countries where changes have the potential to
reverberate across several nations, i.e. East Africa.
16

ESMID Africa – Program for fostering securities
markets
By applying
• World class expertise and alliances
• Local knowledge and alliances
• Integrated, comprehensive programs
• Long-term commitment
• Practical
• Transaction geared
Improved ability to
finance Infrastructure and
housing + through
securities markets and
products
17

Building Markets, Facilitating Transactions
Government/Regulators
Market Infrastructure/Securities
Exchanges
Market Participants
Indirect:
Build Securities Markets
Provide TA to:
• Create enabling environments
• Build market Infrastructure
• Strengthen market participants
Regulators
Marketplace
(trading, clearing, depository)
Issuers
Securities Firms
Direct:
Facilitate Transactions
Investors
Funds to support replicable transactions:
• Structuring
• Documentation
•Legal fees
The The goal: goal: have have a small small number number of of high high impact impact projects projects that that
demonstrate possibilities and and are are replicable
18

IFC’s Role in Bond Market Development in East Africa
ESMID Africa
Technical Partners
(Securities Markets Practitioners/Consultants)
Local Partners
(CMA, NSE, Intermediaries, etc.)
Assistance to
Regulators
Processing
Transactions
Strengthening the
Marketplace
Capacity Building :
Training
Regionalization
19

ESMID Africa – Legal & Regulatory Assistance
Identify main obstacles to bond issuance in laws and regulations
Harmonise issuance and trading requirements in East Africa
Clarify documentation requirements and improve processing schedule
Rationalize issuance costs - High costs discourage bond issuance
Market Structure and bond trading environment: e.g. OTC Market Vs listing
20

ESMID Africa – Processing a Transaction
Bond Issues: Identify bond issues with potential demonstration effect
Cover selected “first-costs” associated with
Structuring fees,
Documentation fees,
Legal fees
Target: Issuers in housing and infrastructure sectors
21
The The ability ability to to do do a transaction is is the the beacon beacon
guiding guiding ESMID’s operations

ESMID Africa – Capacity Building & Certification
Regional Certification program
Formal certification procedure for market players
Adoption of enforceable market code of conduct for market participants
Training on bonds
Targetted at issuers, investors and intermediaries
Training the Trainers
Develop a local/regional institutional provider
Enhancing capacity and market integrity
Enhancing capacity and market integrity
22

ESMID Africa – Regionalization
Key lessons from relevant international experience on regionalization
• Identify suitable models for regionalization
• Identify gaps and obstacles to regionalization and make suitable
recommendations.
• Develop a road-map for regionalization of East African Capital Markets
Regionalization is is a key key operating theme theme for for
ESMID ESMID Africa Africa
23

Conclusions
• Financing needs for infrastructure and housing are enormous. The private sector
can play an important role in this exercise.
• The securities markets can be utilized to raise local currency funding for
infrastructure and housing.
• Developing a corporate bond market is a challening assignment and requires a lot
of commitment and cordination from stake-holders.
• IFC has a program to develop the bond markets in Africa.
24

Q & A
Q & A
25

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THANK YOU