Kenya Bond Tax Seen as New Hurdle for Tiny Corporate Debt Market

(Bloomberg) -- Already haunted by a history of company collapses, Kenya’s moribund corporate bond market risks a fresh setback from authorities plans for a withholding tax on green bonds.

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The proposed tax received the nod from parliament this week, alongside a package of other measures designed to cut Kenya’s budget deficit. The wider bill, which sparked nationwide protests, now requires President William Ruto’s approval. If passed, local investors would become liable for a 5% tax on interest earned from infrastructure and green bonds.

“The proposed taxes will totally dampen that growth of corporate bonds,” said Terrence Adembesa, chief executive officer of East African Bond Exchange, which received its operating license in February and has been hoping to lure new listings. “Issuance is still very low and is actually a concern for us.”

Adembesa said that while Kenya is the third-biggest economy in sub-Saharan Africa, the value of corporate debt issued is barely 0.2% of its gross domestic product. Kenya also lags African nations on the issuance of sustainability-linked securities, he added.

Hopes grew for the market in recent months as Safaricom Plc, Equity Group Holdings Plc and KCB Group Plc — among Kenya’s largest companies — announced plans to issue shilling debt. The companies declined to comment on whether the proposed withholding tax would impact their issuance plans.

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The market faces other headwinds too, including the high yields on government debt — one-year Treasury bills yield about 16% and three-year bonds pay 18%. But the struggle to grow the market has intensified since 2015, when the collapse of Chase Bank Kenya Ltd. and the now-liquidated Imperial Bank Ltd saddled bondholders with losses.

Since then, only five companies have sold debt, according to Nairobi Securities Exchange data, the last being a 2022 issue from Kenya Mortgage Refinance Co. There have been just two green bonds — one in 2019 from student accommodation developer Acorn Holdings Ltd., and one from Burn Manufacturing last year, to expand clean stove-making operations.

Churchill Ogutu, an economist at IC Asset Managers, reckons a revival of the corporate bond market hinges also on greater protection for investors. When Chase and Imperial folded, depositors in both banks were partially compensated, but bondholders lost all their money, he said, adding that Kenya needs a law clarifying how bondholders are treated, relative to other creditors.

‘If you don’t ascertain that fixed income debt is secure, then investors will be shy to participate,” Ogutu said.

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--With assistance from Eric Ombok.

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