What is Corporate debt?
Where do Listed companies like Safaricom get their funding from? Curious, let's explore.
Companies, just like other businesses, require capital to run their operations.
Initial Public Offering (IPO) - the company issues shares in the market in exchange for cash from the investors. Some investors stay away from IPO and refer it to Imaginary Profits Only.
When the company requires more money, it can use one of the three procedures:
Rights issues – offer more shares to the public in exchange for cash.
Loan – approach a bank and facilitate a loan, let's say Equity Bank or KCB.
Corporate bonds
Corporate debt is debt securities issued by a listed company instead of a government. They are attractive since they issue a higher return compared to government bonds. The investor is compensated for the extra risk they have undertaken. Remember high-risk, high return. However, the risk is lower compared to equities.
How it works
The company announces the issuing of corporate bonds.
Investors buy bonds through registered brokers.
The investor is paid out the interest every six months throughout the corporate bond period.
Before the bond's expiry, the investor can decide to sell to another interested buyer via the broker.
At the end of the period, the investor is paid out the initial amount they invested.
Simply you are loaning the company money together with a pool of investors and you will get paid with interest.
Watch out
Bond repayment by a corporate is linked to the health of the company. Thus you should ensure the company will generate enough cash in the future to pay you as an investor. Keep away from struggling companies and only stick to companies with a strong business model that will continue generating cash for the business.
Requirements
All you require to access a corporate bond is a:
CDS account open from a broker, bank or directly from the CBK.
The minimum amount is specified by the issuer but can be as low as Kshs 50 000.
Corporate bonds can be accessed using two markets:
Primary market – when the company issues the bonds to the public for the first time.
Secondary market – the bondholders can sell to other investors in a free market. Your broker can facilitate this.
However, it's largely a buy-and-hold market (initial buyers hold on the initial corporate bond till maturity) with very few trades in the secondary market.
Some listed entities which have issued the corporate bonds include:
NIC Bank
STANBIC Bank
East African Breweries Limited (EABL)
CIC insurance group
Currently in the market 💡
This segment has hugely been impacted by the placement into statutory management of two entities that had issued bonds to the public - Chase & Imperial. The Bondholders are at the back of the queue in terms of the payments, hence taking a significant haircut on their holding.
💇A haircut is simply a lower amount than previously agreed upon
Learn more about statutory management 🔭
This is when a company is on the verge of bankruptcy and new administrators are appointed to help the company turnaround. Recent classic example Athi River Mining limited ARM.
👨🏫Example
Let’s say you invest KES 10 000 in a 5-year corporate bond with a 10% annual return
you will receive the following fixed income:
Y1-first half: 500 ((10 000*10%)/2) - interest
Y1-second half: 500
Y2-first half: 500
Y2-second half: 500
Y3-first half: 500
Y3-second half: 500
Y4-first half: 500
Y4-second half: 500
Y5-first half: 500
Y5-second half: 500 + 10 000 (initial investment)
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Interested in government bonds? Check it out.
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor. Full Disclaimer