CMA Mulls SPVs for Sh0.5t Bond To Clear Pending Bills

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.

Commonly known as Special Purpose Acquisition Vehicles (SPVs), such firms are formed for the purpose of issuing debt or shares, after which they are shut down.

CMA also advised that the government choose a consortium of transaction advisors to assist in arranging the sale of the bond.

According to CMA, the SPV takes up the pending bills and ring-fences a portion of tax revenues as the receivables to back the bond.

“A Special Purpose Vehicle 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.

“CMA Kenya has licensed several investment banks that can competently package a securitization issuance as transaction advisors. Noting the characteristically large size of such securitisation issuances and the relative complexity of a securitization, a consortium of transaction advisors would be advisable,” the regulator has advised.

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.