Sasini Taps Into Bond Market for Sh600 Million

Sasini Tea and Coffee Ltd has launched a Sh600 million five-year corporate bond, becoming the third firm to tap into the country's budding bond market for financing in the last one month. Sasini will be looking to replicate the success of PTA Bank and Barclays Bank, who have issued corporate bonds that were oversubscripted. Hit by lower export earnings from a weakening dollar and cyclic weather conditions, Sasini Tea is looking to invest the proceeds from the bond into value addition processes.

"We are looking to reduce the various exposures that we have faced by going into value addition of our coffees and teas," said Mr Peter Muthoka, the managing director.

Spiral effect

The proceeds will be used to finance the purchase of godowns and packaging machinery for the retail division of the firm. The funds will also be channelled to further expansion, upgrading and computerisation of Sasini's coffee mills and houses. And in a departure from the negotiated fixed price method used in previous corporate bond issues, the issuers will use a bidding process to find an optimal price for the bond. With the bond pegged on a five-year bond rate (currently at 10.04 per cent), arrangers have given the auction a margin range of between 10.25 and 11.75 per cent.

"We are confident that the final price will be close to where the government yield is currently," said Thomas Kabaki, the executive director at Dyer and Blair Investment Bank Pricing of bonds has become a thorny issue with attention focused on the yields on offer.

Required yield or required rate of return is the interest rate that a security needs to offer in order to encourage investors to purchase it. Usually, the required yield on a bond is equal to or greater than the current prevailing interest rates. The rise or decline of interest rates (read Treasury bills rates) has a direct impact on the bond market. This has spiral effect in the pricing if corporate bonds instruments and development of bond market in general.

The floating rate bond is priced using Treasury bills as a reference point. Currently, the local bond market is showing considerable appetite for medium to long-term maturity bonds. Market players say this can be attributed to the relative volatility of bonds at the shorter end of the yield curve, whose value is a factor of the trends in the treasury bills (91-day and 182-day). The longer dated bonds offer more attractive returns and higher periodic cash flows.

With a Global Credit Rating (GCR) that suggests the issuer's ability to meet it's finance costs and support repayments, the bond has adequate hedging to be considered a sufficient and prudent investment. "We will be able to sustain the firm's future finance costs and the costs of the bond that we are taking on," says Akif Butt, finance director of Sameer Investments Ltd, which is Sasini's parent company.

Last year, Sasini had a turnover of Sh1.2 billion. It is expected to surpassed the amount this year, having announced a Sh1 billion turnover in the nine months to September 2007. In the shorter, however, the firm's thinning margins point to lower profits this year compared to 2006. In the nine months ending in September, the firm registered Sh35 million in pretax profits in comparison to Sh351 million registered in 2006.

But while it might take a while for the new revenue streams to make a significant contribution to Sasini's bottom-line, the firm still has to contend with cyclical weather conditions and exchange rate volatility. "We want to avoid the peaks and troughs in our bottomline by increasing our initiatives up the value chain," said Mr Butt.

In the last three financial quarters of 2007, Sasini has registered a foreign exchange loss of Sh14.3 million, which was a massive increase from the Sh819,000 loss registered last year. Like most agricultural exporters, Sasini accounts for its costs in Kenya shillings while its earnings are dollar denominated.

With the Kenya shilling approaching a four and a half year high level against the US dollar, Sasini's export earnings continue to take a huge hit.