As the 2017 general election approaches, there has been debate on the impact of the first Kenyan sovereign bond. On July 6th 2014, the Kenyan government received USD 2 billion from its successful sovereign bond issuance. The positive and strong subscription of the bond allowed the government to go back to the international markets in December 2014, receiving an additional USD 815m in what is referred to as a tap sale. Thus bringing the total proceeds to USD 2.8billion.

The government justified the issuance of this bond by stating that the proceeds were to be used for general budgetary support which included funding of infrastructure projects and repaying a syndicated loan of USD 600m. On the one hand, the opposition claims that there has been no visible impact that the country can see from the bond. The opposition has gone a step further claiming that part of the monies has been stolen. Given the heightened political temperature around this issue, could the government have achieved its objections without having to issue the sovereign bond?

The government could have met part of the issued sovereign bond amounts by: selling some state assets, reducing fiscal deficits (either cut development and recurrent expenditure or both) and lastly raising tax revenues by either increasing taxes or expanding the tax base. The easier pill to swallow is selling certain state assets. A similar exercise is under way in South Africa, with the government recently realizing ZAR28.7bn from the sale of their 13.9% stake in Vodacom.

The Kenyan government has invested in both public and private companies. RisCura, an independent investment analytics and advisory firm, has performed indicative valuations on the more saleable investments in the unlisted portfolio and calculated a figure of approximately KES 70, 102m. This comprises of 8 entities and represents 25% of sovereign bond.

The first step in the valuation process was to determine which of the government’s unlisted assets and undervalued listed assets would meet the initial screening criteria.  The assets had to non-strategic assets, with business operations that would be profitable outside of government’s control. To determine this, the valuations team considered factors such as: the market in which the entity operates, the type of product or service sold, and continued reliance on government’s financial support.

The filtering process was applied to more than 262 state corporations and shareholdings in an additional 17 entities, of which 8 remained. The entities that were excluded in the initial screening were largely regulatory boards, development agencies, public education institutions and corporations where financial statements are not available. Additional entities would potentially meet the filtering criteria if financial statements made available.

A secondary screen was applied to the remaining entities capturing investments in high-demand sectors, and investments with potential to create synergies for the acquirer. Sector demand was calibrated using recent listed and off-market transaction data. Post the secondary screen; all eight investments met the criteria for potential sale. The proposed investments are; Kenya Meat Commission (KMC), Kenya Pipeline Company (KPC), National Oil Corporation of Kenya (NOC), Development Bank of Kenya (DBK), Consolidated Bank of Kenya (CBK), Kenya Wine Agencies (KWAL), National Bank of Kenya (NBK) and East African Portland Cement Company (EAPCC).

Kenya Pipeline Commission (KPC)

The Kenya Pipeline Commission (KPC) was established in 1973 to provide efficient, reliable, safe and cost effective means of transporting petroleum products from Mombasa to the interior. From the last audited financial statements, KPC was profit making with revenues of KES 18,487m in June 2013 and a net income of KES 6,206m in December 2013. The normalised December 2014 revenues were KES 19,617m with a book value of KES 58,443m. The Government of Kenya (GOK) owns 100% of the business. RisCura applied a Price to Book ratio of 0.83x, which resulted in an Enterprise Value of KES 48,502m. The business had little debt at the time resulting in the government’s stake being valued at KES 48,502m.

National Oil Corporation of Kenya (NOK)

The National Oil Corporation of Kenya (NOK) was established in 1970 in order to provide security of petroleum supply of the country. From the audited financial statements, KPC is profit making with revenues of KES 30,923m in June 2014 and KES 33,011m in June 2013. Net Income was KES 212m in June 2014 and KES 211m in June 2013. The government owns 100% of the business and RisCura applied an Enterprise Value to Revenue multiple of 0.27x resulting in an enterprise value of KES 8,218m. The business had debt of KES 1,405m. The government’s stake is valued at KES 6,046m.

Kenya Wine Agencies (KWAL)

The Kenya Wine Agencies (KWAL) imports and distributes wines and spirits. The company’s financials are not publicly available. However in June 2014, Distell paid KES 860m for a 26% stake in the company. This values the Kenyan government’s share of 42.65% investment at KES1, 410m.

East African Portland Cement Company (EAPCC)

The East African Portland Cement Company (EAPCC) manufacturers and distributes cement. In June 2014, EAPCC had revenues of KES 9,057m but made losses of KES 387m. The government owns 25% of the business and RisCura applied an enterprise value to revenue multiple of 1.03x resulting in an enterprise value of KES 9,347m. The business had net debt of KES 4,463m. The government’s stake is valued at KES 1,236m.

Kenya Meat Commission (KMC)

The Kenya Meat Commission (KMC) was established in 1950 in order to provide a ready market for livestock farmers and to ensure that consumers had access to high-quality meat and meat products. From news sources, KMC is loss making with revenues of KES 331m in June 2014 and KES 1100m in June 2013. Industry peers reveal that this business can be profit. The Government of Kenya owns 100% of the business and RisCura applied an enterprise value to Revenue multiple of 0.66x resulting in an Enterprise Value of KES 579m. RisCura used the June 2013 revenues as maintainable revenue. To get a more representative value, financial statements (when published) can help assess the value of excess assets (such as value of excess land) and then subtract net debt from this value to determine what value is due to shareholders.

Development Bank of Kenya (DBK)

The Development Bank of Kenya (DBK) was established in 1963 with the objective of promoting commercially viable projects. The Government of Kenya owns 89.3% of the business. RisCura applied a Price to Book Value multiple of 2.67x resulting in an Attributable enterprise value of KES 7,367m. Government’s 89.3% is valued at KES 6,579m.

National Bank of Kenya (NBK)

The National Bank of Kenya (NBK) was established in 1968 to promote and help Kenyans get access to credit, and control their economy after independence. Government owns 22.5% of the business. RisCura applied a Price to Book Value multiple of 1.50x resulting in an attributable enterprise value of KES 19,810m. Government’s 22.5% is valued at KES 4,457m.

Consolidated Bank of Kenya (CBK)

The Consolidated Bank of Kenya (NBK) was established in 1989 in an effort to stabilise the financial sector through the acquisition of nine insolvent institutions. Government owns 77.8% of the business. RisCura applied a price to book value multiple of 1.07x resulting in an attributable enterprise value of KES 1,674m. Government’s 22.5% is valued at KES 1,303m.

Collectively the above investments sum to KES 70, 102m, representing 25% of the proceeds received from the sovereign bond.

To offset a larger part of the bond, the Government could sell part or all of its publicly listed entities such as Safaricom, Kenya Commercial Bank and KenGen. Additionally, a large part of the Government’s wealth may lie in public land which can also be realised.

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