The Capital Markets Authority (CMA) has advised the government to use a shell company to issue a bond to enable Kenya clear Sh500 billion in pending bills.
The regulator, in its quarterly report for the three months to September proposes that state sets up Special Purpose Acquisition Vehicles (SPVs) to handle the pending bills headache that has seen several businesses collapse.
SPVs are short-term firms mostly domiciled in low tax jurisdictions for the purpose of issuing debt or shares, after which they are shut down.
“A SPV may be established to take up all pending bills, ring-fence a portion of tax revenues as the receivables to back the issue of a bond, whose proceeds may be used to settle the bills in a securitisation programme,” CMA said.
Securitisation programmes have a standard structure in which a special-purpose vehicle is established as an independent legal entity.
The originator which is the institution raising capital then sells the rights to its cash flows, be they loan repayments or other kinds of future receivables, to the SPV, and the SPV issues a bond that is bought by investors.
The capital raised by the bond is then put to use by the originator, whereas the underlying cash flows to the SPV are used to ensure that investors are repaid the principal and interest on the bond.
The regulator has since licensed several investment banks that can competently package a securitisation issuance as transaction advisors.
''Noting the characteristically large size of such securitisation issuances and the relative complexity of a securitisation, a consortium of transaction advisors would be advisable,” the regulator says in the report issued Tuesday.
Even so, the proposal has attracted a debate amongst economists and financial experts, with the majority terming the plan as highly unsustainable.
For instance, economist Mohamed Wehliye asked where the government will source the tax revenue to ring-fence from.
He argues that if there are revenue streams available, why not issue normal Treasury bonds and service the debt with revenue stream?
Taking to Twitter, Wehliye wonders if the fund will target the same pool of buyers of local bonds and if so, will this not scare the markets more?
"Tax revenues go to consolidated funds and the first charge is debt. So there is no extra comfort provided by the securitisation?''.
According to him, some of the pending bills are dollar-denominated and owed to foreign contractors hence will raise FX concerns if the fund is raised in local currency.
His sentiments are shared by Jared Chegero, a financial risk expert who argues that the idea of SPVs will further raise the country's debt obligation.
''SPVs come with extremely complex demands and are expensive. The idea is good but not for a market like Kenya,'' Chegero told the Star on phone.
Daniel Milimu of Apex Capital wonders why the CMA wants to create complexity around pending bills.
''SPVs are tough to manage. This idea is noble but not a solution to the panding bills situation in Kenya. This will only make suppliers wait longer yet they need their money like yesterday,'' Milimu said.
Even so, there are some like Dan Iningu who says that with SPVs, the invested money will be recovered in case the originator fails to meet his obligations.
However, he thinks that this may send bad signals-high possible loss of invested money necessitating investor shielding.
The new administration inherited more than Sh500 billion owed to suppliers and contractors by ministries and State agencies in bills that have exposed many small and medium-sized businesses to closures and auctions.
