hi guys sorry for the silance kiazi mingi,

@scubidu the senior subordinated cfc stanbic bond would not have a fixed and a floating rate of intersst if it were not using the tranche system of payment of interest to investors.With an option to invest on either a fixed or floating rate basis, the pricing for the first part stands at 175 basis points over the seven year bond.

This is the first tranche of a $64 million, capital raising exercise being undertaken by CFC Stanbic Bank. The net proceeds will be channeled towards general corporate purposes, liquidity and capital management as well as future growth of the bank, particularly its home loans portfolio.


we know very well that bonds have to be rated to establish their creditworthiness and so fitch rated the cfc stsnbic bond as BB+ which, according to them was distinctly speculative.

The balance of the capital raised is likely to be a combination of Tier II and senior debt and is expected to be raised within the next 12 months in the same market.a tier II implies that it could use Subordinated or revaluation reserves.

the tranche system works in both ways- in times of liquidation of the asset the senior tranche gets payment first befor any other creditor and when interst payments are made.

emlyn

Hi Scubidu,

Thanks for the update...

Might you have more details regarding the Housing Finance bond that is supposed to be issued this month?

Hi scubidu,

I finally managed to get a PDF copy of the Housing Finance Information Memorandum. You can get it from their website.

As for the "new" bidding system, what CBK is aiming to let the market determing the coupon rate for a particular bond issue. For instance, for a 2 year bond, the coupon rate for the bond issued in January 2010 was 8%. Now, investors have to let CBK know what rate they would like to be paid.

The big fuss with the bond traders, and their push for the system to be rejectd, is that there is too much liquidity in the market. Hence, this will lead to instances where the proposed rate could be much lower than the "ideal" rate.

I don't think the system can be rejected as it has been used in the March 2010 auction of the same bond.

Hope this helps!

Hi Scubidu,

Regarding the 2 year bond issue, now you understand the fears that they have. I believe that the obsession by CBK with reducing interest rates is punish banks for not reducing their lending rates and/or increasing lending to the private sector.

If I were an investor, I would rather stay out of the market till sanity returns...there is no way am investing in products where the risk premium is too small/negligible for the risk you are taking or you are getting a negative real rate of return.

When looking at the HF Information Memorandum, did you get the impression that small investors are not welcome. Should the issue be oversubscribed, any investor who applied for Kshs. 100 million and above will receive their full share.

For sub ordinated, banks can be allowed to include it as part of their Tier II capital. If it has a duration of 5 years or more, then the entire amount can be allowed. Otherwise, it is prorated for lower durations.

Of note, if you look at the proposed requirements for Basel III, banks will be discouraged from this practise.

Regards

Hi Scubidu,

There are two components of capital for a bank

Tier I - which is mainly made up of share capital (including share premium), retained earnings and preference share capital

Tier II - which would include such items as subordinated debt and general provisions.

Most financial institutions would prefer to issue subordinated debt to share capital due to the message it wants to send to the market.

For instance, HF had earlier indicated that they would either issue more shares or debt this year. There was a feeling that investors would be fatiqued by another rights issue after the one they did in 2008. Thats what you saw with the KCB rights issue - hence it was under subscribed.

Hope this helps.

Scubidu,

I don't think a bank would want to issue either shares or debt if they already meet the minimum capital requirement. FYI, Barclays did issue the first tranche (Shs. 5 billion) of a Shs. 12 billion subordinated debt in 2007/2008.

Also, its not about the level of capital that you have, but how well you put your capital to use. Equity Bank is currently trying to figure out how to use its large capital base hence their big interest in Housing Finance.

For KCB, the decision for opt for debt or equity is purely a management decision. Maybe they decided to have a rights issue first then a debt issue later..like what HF did.

For HF, you shouldn't be worried about financing costs. Look at Net Interest Income instead...which compares the interest income earned on the mortgages to the cost of funding deposits/debts.

Cool scooby. I'm actually looking at the interest margin for Q2 which wasn't really good, but i hope HF can translate those funds into revenue. They don't seem to hold much govt debt so i hope they have good liquidity in future to leverage on their capital base.

http://www.basel-ii-acco...uents_of_capital_49.htm

@CMG. Debt financing is indeed cheaper in terms of the intermediary costs vs bank loans. But with banks like HF I'm wondering whether leverage is really the best thing, given the statement some guys have made on real estate on the basel post.