Creating A Network of Underwriters Would Boost Debt Markets

Presently, there are no official underwriters for the bond markets in Kenya. When a prospective issuer float securities in the debts market, they use arrangers such as investment banks. But arrangers are not underwriters.

Ruto at NSE (1)

By gatuyu t.j

RISK is everywhere, and it is perceived differently.  For an entity seeking to tap the capital markets and raise funds by issuing fixed income securities, it is more than afraid. Because debts are sometimes known to bite. More importantly, no one wants to move into the markets and issue securities that receive no uptake.

A flotation failure hurts. It humiliates a company and may often occasion other negative ripple effects, including reputational nightmares.  Equally, there are costs incurred, from the incidental flotation costs to the opportunity costs incurred in failure to raise funds.

To provide a safety net for the intending issuers of debt securities, a network of underwriters in the capital markets is necessary. These are risk-taking companies, that commit to taking up the issuance that general investors may have shunned, or are unable to absorb.

Presently, there are no official underwriters in Kenya. When a prospective issuer floats securities, maybe at the Nairobi Securities Exchange, they use arrangers such as investment banks. But arrangers are not underwriters, even though they may play a similar role. They neither assume the listing risks nor do they take responsibility for a botched issuance.

For the Kenyan capital markets that have been in comatose, no serious bond issuance has been done for a long time. When the East Africa Breweries floated their bond at the Nairobi Securities Exchange,  their prospectus indicated the issue was underwritten by a syndicate of banks. To a blue-chip company like EABL, attracting the banks to do the underwriting is easy. For other entities seeking to tap the markets, it may not. And it should not be that way.

President Ruto’s administration has rooted for the revitalizing of the capital markets. The President’s signaling is super welcome. One of the things the government may do to revitalize the fixed-income markets is to encourage a network of underwriters. This could be done by having the treasury bonds become the entry point of underwriters and serve as benchmark assets.

Even with treasury bonds, there are no official underwriters. The is some difference. The way the treasury bonds are currently structured, underwriters are not needed. This is because whenever the government issue receives less than 100% subscription, the Treasury takes whatever they realize, and thereafter, looks for alternative sources of funds or re-open the same issue through taps sales. And when the investors become enthusiastic, the treasury will even take more than they went to the market for through the green shoe options.

But this practice is not admirable.  It is not a good strategy to develop the markets. It stifles the development of both the on-the-run treasuries and even the off-the run-treasuries. Taking an alternative world with official underwriters, the government would tap the debt markets more often because they would be assured of an uptake. Consequently, there would be no need for periodic re-opening of an issuance as it is with the prevailing practice. Properly developed treasury bond markets will signal the corporate bonds markets to a move.

For having a well-developed treasuries, and escalating them as the benchmark assets, corporate entities will find liquid markets from which they will easily tap, and boost the overall debts markets performance. But, first thing first. An initial step is to reduce the listing risk, by encouraging a strong network of underwriters.

The Writer is a columnist with the Gatuyuriana

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