KA-INVESTOR
KenGen’s 10 years public infrastructure bond offer ( [www.kengen.co.ke] ) opened yesterday with little enthusiasm from local investors [blame it on the short publicity period]. I had previously posted the main features of the bond offer here. The offer's information memorandum is out, both in hard-copy and soft [courtesy of ribacapital.com]. I skimmed through it and came up with the following highlights:
- It is a fixed rate long term unsecured public infrastructure bond offer [meaning?]
- NSE/CDSC is expected to operationalise electronic CSD accounts for bonds to enable investor immobilize their bond certificates [despite the fact that it will increase bond liquidity, I don’t think it’s a good idea. Look at the mess the equities market is in due to this]
- KenGen has 14 directors (3 female, 11male)
- East African citizens from Uganda, Tanzania, Rwanda and Burundi are considered as local investors.
- Proceeds of this infrastructure bond offer will be used to increase KenGen’s generation capacity by 528.6 Megawatts in the next four years.
- KenGen has approval to put a 600Megawatts coal plant in Mombasa in partnership with a joint venture partner [with KenGen owning between 40% and 49%, while the Venture partner owns the rest]
- KenGen produces (1,008.8 MW) 75% of Kenya’s electricity requirement. The rest is produced by: Iberafrica – 56 MW expected to increase to 108 MW [thermal]; OrPower4 – 48 MW [geothermal]; Tsavo – 74 MW [thermal]; Mumias Sugar Co. Ltd. – 2 MW expected to increase to 25 MW [cogeneration]
- Rabai thermal power plant [diesel powered], a new station still under construction, will produce an additional 90 MW once completed.
- KPLC monopoly as a distributor is set to be curtailed once the newly commissioned KETRACO (Kenya Transmission Co. Ltd) develops a new national transmission network [at least for the bulk consumers]
- Shareholding: GoK has the majority shareholding at 70%, while of the total 216,728 shareholders more than 63% hold less than 1,000 shares [42% with less than 500 shares]
- It’s assumed that KenGen will maintain a 60:40 debt/equity ratio even after the bonds are issued. However the bond amount would not be enough to finance the expected projects and the company will have to raise Ksh10.2 billion [US$135 million] through a rights issue, plus repatriate all its profits in the next four years towards this projects so has to remain within the 60:40 capital structure. [Dividends will then be a thing of the past!]
- Risks to note:
- Construction risk arising from delayed completion and commissioning, escalating cost of construction
- liquidity risk and default risk in respect of power purchase agreements with KPLC
- adverse weather conditions [like drought which can be mitigated by diversification of generation sources]
- change in regulations and fiscal policy in tax rates and levies by GoK [n it's still the biggest shareholder]
- KenGen’s ability to roll out capacity expansion projects is held back by KLPC’s ability to transmit the same to the consumers
- Lack of a well developed bonds market will affect investor easiness of exit
- Joint applications to meet the minimum investment amount of ksh.100,000 is allowed, but not encouraged.
- Applicants who wish to credit their bond allocation into their CDS accounts’ will have to pay an extra 30 bob [to cater for the cost of postage for a CDS account statement?]
- The placing agents will receive a 0.25% commission of the offer price of the bond allocated per applicant. KenGen’s expenses for the bond offer is estimated at about Ksh.229 million
- The memo assumes Kenya has a population of 37.2 million people [why was I counted?]
- Kenya has tax treaties with Uganda and Tanzania that are not yet in force
- There are other 73 state bonds, 8 corporate bonds issuers with 11 bonds/notes, with a total market capitalization of Ksh.326 billion as at June 2009
- Auditors’ statements to note:
- Despite PWC giving a clean bill to the financial statements of KenGen, they note that after change of accounting policy by the directors in February 2009, the company failed to comply with IAS 21 that would have seen KenGen record a Ksh.5.4 billion loss in their interim reporting ended 31/12/08. This being as a result of unrealized exchange losses and thus gives a qualified opinion on the said results.
- Its likely that a Ksh.826 deficit with KPLC will not be honored and KenGen may have to settle it
- KenGen further failed to comply with IAS 19 that require they conduct an actuarial valuation. The last valuation done by the company is dated back in 2006 and may not indicate the true picture of the company’s assets value
- The power purchase deal between KLPC and KenGen doesn’t look good to me. KPLC has constantly arm-twisted KenGen into accepting lower prices. So much for a monopoly distributor.
