Safaricom CEO Peter Ndegwa.
Safaricom is luring investors with a tax-free Sh15 billion green bond to be used in transitioning its sites to solar power, among other sustainability projects.
The telcom operator is offering 10.4 per cent tax-free return to those who invest in its five-year bond, which closes on December 5.
Safaricom said it will be using proceeds of the bond to fund projects under its environmental, social and governance sustainability programme, which includes transitioning at least 5,000 sites to solar power.
Safaricom’s bond issue comes soon after East African Breweries limited (EABL) offered 11.8 per cent to investors in the first tranche of its Sh20 billion bond.
However, investors in the Safaricom security will be taking home a higher return as the green bond does not attract 15 per cent withholding tax that is payable on interest earned from corporate bonds such as the one issued by EABL.
This means the Safaricom bond is offering an equivalent of 12.35 per cent if it were tax inclusive – being a higher yield than EABL’s 11.8 per cent return.
“As at the date of this Information Memorandum, interest income payable on the notes under any tranche that are certified to be used to raise funds for infrastructure, projects and assets defined under Green Bonds Standards and Guidelines, and other social services, where such Tranche has a tenor of at least three (3) years will be exempt from withholding tax,” reads Safaricom’s Information Memorandum.
The bond has a five-year tenor, qualifying it for the exemption.
Safaricom House in Westlands, Nairobi.
Safaricom can raise a maximum of Sh20 billion from the first tranche in case of an oversubscription as it can take an extra Sh5 billion in what is termed a greenshoe option.
The green bond comes at a time when interest rates have been on a downward trend as the Central Bank of Kenya intentionally rejected high priced money in Treasury bills and bonds markets.
Currently the 10-year bond is trading at 13.05 per cent being 2.87 percentage points lower than rates offered a year ago.
“Despite the lower yield, we anticipate strong potentially oversubscribed demand for the note, supported by the company’s low-risk credit profile, large customer base, and the growing global and local appetite for ESG-linked investments,” said Valerie Okello, a research analyst at Capital A Investment Bank.
EABL raised Sh16.7 billion in the first tranche of its Sh20 billion bond, in which it was targeting Sh11 billion, signalling market appetite for well-rewarding corporate bonds.
Safaricom last year borrowed Sh15 billion in the second tranche of its Sh30 billion sustainability-linked loan from a consortium of four banks.
“Environmental, Social and Governance instruments are typically floated below market rates to attract the expanding pool of sustainability-focused investors, and Safaricom is leveraging both the greenium narrative and the broader social impact of the note to justify the modest pricing,” added Ms Okello.
She noted that issuing a corporate bond is a more cost-effective funding option for Safaricom compared to sourcing bank loans, which would likely come at significantly higher rates.
The four participating banks were KCB Bank, Absa Bank, Stanbic Bank and Standard Chartered Bank.
Besides interest rates, banks also charge fees and commissions, which push up the price of the debt. The banks could also have been thin on headroom to accommodate additional lending to Safaricom owing to the single obligor rule. The rule dictates a bank cannot lend more than 25 percent of its core capital to a single borrower.
The tax incentive will see the taxman foregoing Sh1.5 billion, which he could have collected over the five-year period of the Sh20 billion the telcom could raise in the first tranche.
Other corporate bonds in the market include Family Bank’s Sh3.7 billion bond maturing next year priced at 13 percent, and Kenya Mortgage Refinance Company seven-year bond offering 12.5 percent and maturing in 2029.
The corporate bond segment has been dented by issuers who went belly up soon after issuing their notes, including Imperial Bank and Chase Bank. Micro-lender Real People, which has Sh1.63 billion in outstanding notes, also ran into financial headwinds soon after issuing its medium-term notes.
Safaricom’s first corporate bond is thus expected to revitalise a debt segment which has been in a lull for years as Treasury bonds dominate.
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