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There is capital for medium to long term at attractive rates under an automated trading platform

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The vibrancy of the secondary bond market has increased since the implementation of automated trading on November 25 last year.
Comparison of the fourth quarter of 2009 bond performance to the first quarter of 2010 indicates an increase of 214.21 per cent in turnover.
In fact, bond turnover for the first quarter of 2010 stood at Sh118.7 billion, which represents an increase of 7.3 per cent on the total annual bond turnover for 2009, which was Sh110.645 billion.

The number of deals in the secondary debt market are steadily increasing with 393, 691 and 839 deals recorded for January, February and March respectively.

Government bonds continue to dominate the market, having accounted for 98 per cent of the total bond turnover for the first quarter of 2010.

Contrast this with the fact that out of the 9 listed corporate bonds, only one bond, the KenGen Public Infrastructure Bond, has been actively traded in quarter one of 2010, registering Sh1.313 billion in turnover. Prior to the immobilisation of the KenGen PIB in November 2009, no corporate bond had traded in the preceding six months.

It is worth noting that the KenGen PIB is the only immobilised corporate bond that is trading on the ATS (automated trading system). The other bonds have been operating in a manual environment.

The illiquidity that has previously dogged the corporate bonds segment is set to change following the immobilisation drive currently under way. In liaison with the depository and regulator, communication was made to investors that as of the of April 21, 2010, all listed corporate bonds shall trade on the ATS in a total shift from manual to automated trading in corporate bonds.

Holders of corporate bonds are required to surrender their bond certificates to their respective brokers or Central Depository Agents (CDAs), who would then forward them to the company registrars for verification.

The investor, or bondholder, would have his CDS account credited with the bond.

This is because the agent responsible for the settlement and clearing of corporate bonds will be the Central Depository and Settlement Corporation (CDSC) while settlement for government bonds is done by the Central Bank of Kenya (CBK).

Therefore, a bond holder who is active in both the government and corporate bonds segment would require two CDS accounts; one with CDSC and the other with CBK.

Immobilisation of corporate bonds will have a positive impact, in both the primary and secondary markets. The first will be increased in liquidity, which basically refers to the ability to trade quickly at a known yield with reference to bonds.

Liquidity premium, which is charged by investors to compensate them for a perceived lack of liquidity, has previously pushed up the required return by investors.

This is because in the manual trading environment, a majority of corporate bond holders held issues to maturity and with no active market in the particular issue, determination of yield became a challenge where an investor sought to buy or sell. With automation, the settlement cycle for corporate bonds will be on a transaction plus 3 (T + 3) basis as compared to previous uncertainties within the manual trading environment.

Automation will also mean that corporates are able to issue smaller bond sizes, making the bond market more accessible to all, even medium scale enterprises.

Further, this will revitalise the corporate bond segment through introduction of a diversified risk/return profile. It will also enable increased participation by the sophisticated private individual investors, who would wish for fixed income exposure in the corporate segment, in a bid to diversify their portfolio risk.

A look at the overall interest rate trends would indicate that they are on a decreasing trend. The 91 and 182 day Treasury Bill rates in April alone, have reduced from 5.75 per cent and 5.94 per cent to 4.9 per cent and 5.45 per cent respectively.

The lower yields in the primary market are indicative of investors looking more into the secondary market to target the previously issued higher yield instruments.

There is appetite for corporate bond issues and this can be seen from the oversubscription of issues of 2009; CFC Stanbic was oversubscribed by 28 per cent; Safaricom by 50 per cent; KenGen by 77 per cent and Shelter Afrique 8 per cent.

There is an abundance of capital available for medium to long term use, attractive rates ranging at a weighted average of 11.38 per cent and an automated trading platform that increases liquidity and objective yield determination. How the market chooses to interpret this environment remains to be seen.
By PETER MWANGI Mr Peter Mwangi is the chief executive of the Nairobi Stock Exchange.
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