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PRESENTATION OUTLINE
Capacity of the Market
Scope of Funding Options
Considerations
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CAPITAL MARKETS ROLE IN THE ECONOMY
Provide long-term capital through mobilization of savings
Facilitates broader ownership of productive assets and inclusivity
Diffuses stresses on the banking system by matching long-term investments with long term capital
Promotes public-private partnerships: effective risk allocation
Releases Government resources to support non-commercial activities and socio-economic development
Provides investment opportunities and supports domestic savings to encourage capital formation over consumerism
Improves efficiency of capital allocation through competitive price discovery and valuation of entities
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FINANCING ECONOMIC TRANSFORMATION
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Government Banks Private sector (Capital markets )
Economic
Transformation
Level of Development
FUND RAISING CAPACITY OF THE MARKET
Over the last 8 years, the capital market has raised over Kshs 2.4 trillion through bonds and equities domestically
Over Kshs 800 billion has been raised in the last 3 years notwithstanding the global financial crisis
The value of listed securities currently at Kshs 2 trillion which is more than 50% of Kenya’s GDP
The NSE index returns for 2013 amount to 49%
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Fund Raising Capacity Of Kenya’s Capital Markets – Kshs Billion
*up to April 2014: Excluding Rights Issues and Additional Offers
2014* 2013 2012
2011 2010
2009
2008
2007
2006
TOTAL
Bonds 143.3
453.7
194.5
228.6 373.5
316.9
98.9 146.9
130.3
2,086.3
Equity
(IPOs)
0 0 0 3.6 0 0 271.4
10.5 35.6 321.1
Total 143.3
453.7
194.5
232.2 373.5
316.9
370.3
157.4
165.9
2,407.4
Collective Investment StructuresDiversification: access a broader range of securitiesLiquidity: continuous opportunities for redemptionProfessional Management: qualified full time professionalsRisk appetite alignment: regular income plan, growth plan, equity funds, debt funds and balanced funds..Tax Benefits: The CIS income is tax exempt, and this can be extended to unit holders in form of better returns.Spreading the risk: don’t put all your eggs in one basket, even with small investment can invest in a variety of securities
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Collective Investment StructuresEnsure diversification risk as well as ownership
of core infrastructure and cascading of ownership
CIS Units allow for substantial reduction of the investment thresholds for participationRetail and community participation through CIS
component of funding / ownership structuresTranslates to national connection to key
projects requiring community support (oil exploration, pipelines, dams. Ports)
Unit allocation may be based on future revenue entitlements of affected communities to ensure ownership even before production achieved
Transparent, subject to Effective Oversight and where listed Liquid 8
CIS for Compensation StructuresOptions to use Units in CIS that is investing in
pipeline, port etc for purposes of land compensationConversion ratio to take into account future
value of project as against speculative projections on current land price
Reduce the absolute compensation ratesMay be complemented with small cash
payment to individual upfront but majority can be translated into value in the project Ensures ownership and support and manages
upfront costs
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Real Estate Investment TrustsDesigned with particular focus on existing needs
and environment by lowering investment threshold for domestic participation
Two structuresDevelopment REITS: Funding for
construction of real estateIncome REITS: pooling income generating
properties and unlocking value through sale to a REIT
Used for full spectrum of real estate funding globally
Allows existing real estate investors to recycle capital & invest in new productive assets
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REIT Investments• Offices, Hotels• Residences, Apartments, Serviced Accommodation• Industrial – Factories, Warehouse, Logistics, Cold Storage• Shopping malls - markets• Hospitals – Clinics, Age Care Units – Disabled care• Schools, Universities, Student accommodation• Storage Units – Car Parks• Ports, Airports• Specialist property –Food/Horticulture Processing - Science
Labs• Theme Parks – Leisure – Stadiums – Convention Centres• Mines, Communication Towers, Toll Roads, Water
Treatment, Power Stations • Plantations, timber, vineyards • REITS of REITS - Securities & Synthetic Property – Long &
Short Funds 11
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Promoter
REIT securityHolders - units
REIT Manager
May be investor in REIT must be if transfers land
Debt Financing
Where performance is already well established (balance sheet based) or future prospects are more assured:•Corporate Bonds (balance sheet based)
•Convertible Bonds (B/S plus participation in future corporate performance)
•Infrastructure bonds/ project bonds (ring-fenced revenue)
•Asset backed securities/ Securitization (wholly segregated revenue based / off balance sheet financing)
Convertible BondConvertibility to equity at option of
Bondholders at future dateConversion ration fixed at time of bond issuance Given future prospect of participation in profits
beyond fixed return bond rates substantially reduced
Investors have opportunity for short to medium term fixed principal and interest payments and equity upside once investment begins performing by converting outstanding balance
Convertibility provides “sweetener” to reduce demands on additional collateral or guarantees
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Infrastructure / Project BondsDebt serviced by revenues from specified
infrastructure / projectAssets are ring-fenced through applicable contracts
but still form part of borrowers balance sheetLower structuring costs due to absence of asset
transfers and payment of intermediaries involved in full securitization
Margin Paid potentially higher than for securitization as not as high a level of certainty on proper use and management of ring-fenced revenues
Risk of breaches of contract or recourse to assets in case of insolvency of borrower dependent on terms
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SecuritizationOutright transfer of underlying assets off
borrowers (originators) balance sheet to SPVNo recourse by originator to the transferred
assets (quality of valuations and future flow projections is key)
Securitization may be of existing performing assets or entitlements to receipt of future revenues
In the case of loans/ mortgage/ leasing assets allows originator to realize the value of future receivables immediately freeing space on balance sheets and provides capital to commit to new business
Involvement of additional intermediaries creates greater certainty for investors 16
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Arranger(of securitization transaction)
Securitization VehicleAssetsPool of collateral assets
Originator(s) (of assets)
Investor(s)(in securities)
Assets
CashCash
Securities
Other participants (as needed):+ Credit rating agencies+ Quality control firms+ Servicer+ Trustee+ Lawyers+ Collateral Providers / Guarantors+ Asset Managers+ Custodian
International Demand2014 Eurobond provides strong indicators for
Kenyan debt:Up to USD $6.8 Billion offeredKSH equivalent: 585 billion
Demand evident despite current macro and political environment
Sovereign rates were globally competitive with potential to come down further
Project based borrowing has potential to attract infrastructure focused funds as distinct from sovereign funds
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Incentivize Domestic Retail SavingsUgand
a KenyaTanzani
aRwand
a TotalGDP 21.2 40.7 28.5 7.1 97.5Domestic Market Cap (US$ Billion) 1.2 22.0 3.8 0.9 27.9Domestic Market Cap as a % of GDP (Equity) 6% 54% 13% 12% 29%
Market Cap as a % of GDP (Bonds) 0.3% 1.8% 0.3% - 0.9%
Domestic Listed Companies 8 60 12 2 82Average Market Cap (US$ Million)
151 367 317 440 340
Equity Turnover (USD billion) 0.10 1.84 0.16 0.08 2.18
Liquidity (%) 1.2% 8.3% 1.5% 3.3% 5.1%
Corporate Bonds (US$ Million) 58 750 94 - 902Domestic Savings as % of GDP 14.7 9.6 19.2 10.8 13.6
2012 figures – for illustrative purposes only. IMF Statistics
Comparison with similar sized market cap countries outside EAC
Kenya Banglade
shViet Nam
Sri Lanka Morocco
GDP 40.7 123 155 59.4 96Domestic Market Cap (US$ Billion) 22.0 52 38 17 53Domestic Market Cap as a % of GDP 54% 42% 24% 29% 55%
Domestic Listed Companies 60 453 704 287 77
Average Market Cap (US$ Million)
367 115 54 59 685
Equity Turnover 1.84 21 15.8 1.7 5.8
Liquidity (%) 8.3% 40% 41% 10% 11%Domestic Savings as % of GDP 9.6% 29% 33% 24% 26%
2012 figures – for illustrative purposes only. IMF statistics
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QUESTIONS