[2008-09-29]  Bond market remains unattractive to retailers
Even with attractive returns and predictable income streams, retail investors continue to give the bond market a wide berth.

Investment bankers blame the tendency on the risks involved and lack of investor awareness on existing opportunities in the bond market.

"With prevailing high inflation rates, at 27.6 per cent for August, this has eroded returns on bonds, currently pegged at between 12 and 15 per cent," says Mr Odhiambo Ocholla, Head of Investment Banking and Fund Management, Suntra Investment Bank.

Apart from inflation, retailers have kept off the bond market due to rising interest rates.

With low activity in the secondary bond market (at the Nairobi Stock Exchange), this has had the effect of affecting liquidity in the bond market, discouraging retailers who may need to sell off their holdings to meet short-term liquidity requirements.

A 10-year Treasury bond issued by Central Bank of Kenya (CBK) on September 29 worth Sh8 billion, attracted bids worth Sh4.3 billion, recording a 53.9 per cent subscription.

Also acting as a disincentive to retail investors is the long settlement period in the bond market.

It takes five days to cash a bond owing to the huge paper work an administrative logistics between CBK and stockbrokers.

"There is opportunity lost within these five days for investors," said Ocholla.

Average interest rates in the bond market are about 11.75 per cent, well above the three to four per cent return on savings accounts or gains made at the Nairobi Stock Exchange, where prices are currently depressed on most counters.

CBK figures shows the Government as the most dominant player in the bond market, an issuer of 70 Treasury bonds with maturity ranging from one to 20 years.

For instance, the amount of debt outstanding issued by the Government, in Treasury bills and Bonds, stood at Sh312 billion as at September 5.

Commercial banks

While commercial banks held 48.2 per cent of these instruments, building societies had 0.4 per cent, insurance companies (12.5 per cent), Parastatals (8.5 per cent) while others including retailers had 30.4 per cent.

"Commercial banks hold the largest portion of this debt. There are also the key players in the secondary bond market, through their treasury departments," says Ocholla.

Other issuers in the bond market are Preferential Trade Area (PTA) Bank (Sh1 billion), East African Development Bank (EADB) (Sh 800 million), Athi River (Sh800 million), Shelter Afrique (Sh500 million), Faulu Kenya (Sh500 million), Mabati Rolling Mills (Sh1 billion) and Barclays Bank (Sh3 billion).

"The bond market also faces stiff competition from syndicated loans from commercial banks, that offer attractive pricing," says Ocholla.

Another challenge facing growth of the market is bureaucracy and regulatory bottlenecks.

It takes a minimum of two months for an issuer to get the necessary approvals to bring a corporate bond in the market.

This compares with less than a week required for the same firm to arrange for a syndicated loan from commercial banks.
Source: The East Standard