Companies with loan facilities pegged on Treasury bill rates are set for significant savings in finance costs following the fall in the interest rates on the short-term securities in the last two months.
Banks often price short and medium-term loans to companies at the prevailing Treasury bill rate plus a premium. They do so to protect themselves from losing their margins when the cost of funds goes up as they compete with the Treasury for private sector deposits.
Since the beginning of October, the rate on the 91-day Treasury bill has fallen by 5.7 percentage points to 10.03 percent, while that of the 182-day paper has declined by 6.6 percentage points to 10 percent. The 364-day T-bill rate has come down by five percentage points to 11.75 percent.
Listed companies such as EABL, Centum and Crown Paints are among those with shilling loans pegged on these rates, with some facilities alternatively pegged on the Central Bank rate (CBR), which has been progressively cut to 11.25 percent from 13 percent since August.
Citi Kenya managing director Martin Mugambi said last week that lenders are already transmitting the lower T-bill rates to pegged facilities, with those which are pegged on a bank’s own base rate plus a risk premium also set to come down as the lenders cut their pegs to reflect the reduced cost of funding.
“For Citi, a lot of our rates are contractual and have a peg of T-bill rates, and for these ones we are transmitting the rate change. Short-term facilities based on a risk- based model have also started adjusting,” said Mr Mugambi.
The Central Bank of Kenya (CBK) has also been putting pressure on banks to cut their lending rates to reflect the lower T-bill rates, saying that this is necessary to reverse the slowdown in private sector lending and help reduce the high volume of non-performing loans in the banking sector.
Companies have generally identified financing costs as a major concern this year, saying that it has raised their cost of doing business and affected profitability in an already challenging economic environment characterised by reduced consumer buying power.
In its annual report for 2024, EABL listed eight loans valued at a cumulative Sh22.4 billion that were pegged on the six-month T-bill and one facility valued Sh3 billion pegged on the CBR.
On eight of the T-bill pegged loans, the company said it pays a premium of between 1.5 percent and 2.45 percent on top of the prevailing rate of the security.
These loans were a major contributor to the 49 percent increase in EABL’s net financing costs to Sh8.17 billion in the year to June 2024, despite a reduction in overall debt.
Centum Investment Company, in its annual report, said that as at March 2024 it held overdraft and term loan facilities with Stanbic Bank valued Sh1.9 billion, priced at the prevailing 182-day T-Bill rate plus 2.7 percentage points.
Its subsidiary Vipingo Development Plc also reported a Sh3.1 billion facility with Standard Bank of South Africa, with a base rate of the 182-day T-Bill and a margin of 3.5 percentage points.
Crown Paints held Sh239 million worth of short-term notes at the end of 2023, priced at the prevailing 91-day T-bill rate plus 1.5 percentage points and maturing within a year.
