Multinational companies pump cash into subsidiaries for optimal returns

Money Markets

Mr Anthony Jenkins, Barclays PLC CEO. Photo/AFP  

By GEORGE NGIGI, gngige@ke.nationmedia.com

In Summary

• Firms fund units in economies such as Kenya where the cost of money is prohibitive.
• Some of the firms that have advanced billions to their operations in the country include Standard Chartered, Barclays, Total and Orange.
• Local institutions also have had a strong appetite for balance sheet support from low-cost 

Multinationals are using their huge cash holdings to get optimal returns from subsidiaries and support operations in high-interest rate economies.

Interest rates have been kept artificially low in the European and American markets, enticing companies to fund subsidiaries in economies such as Kenya where the cost of money is prohibitive.

Some of the companies that have advanced billions to their operations in the country include Standard Chartered, Barclays, oil marketer Total and telecom company Orange.

“The Kenyan economy has in the recent past achieved forex rate stability while interest rates have remained relatively high. This disparity has offered obvious arbitrage opportunities attracting foreign institutions to make investments.

Local institutions also have had a strong appetite for balance sheet support from low-cost sources,” said corporate finance consultant John Kamunya.

Stanchart received Sh1.7 billion ($20 million) loan from its London-based holding company early this year to boost its capital base. The unsecured loan is pegged on the London interbank offered rate.

Last year, StanChart Kenya paid an effective rate of 2.49 per cent to its holding company for a similar loan taken from the parent firm.

Barclays Bank took a Sh1.4 billion subordinated debt from the parent company in 2012. It still had Sh400 million outstanding at the end of last year.

“Global economic growth has faltered in recent years. This has prompted unprecedented monetary policies across central banks, for example quantitative easing and near zero interest rates,” noted Barclays Bank PLC chief executive Anthony Jenkins in the company’s annual report.

Economies that were strongly affected by the financial crisis have been seeking to revive their economies by offering cheap loans to businesses so as to reignite growth.

The local companies have thus turned to their parent firms due to their need for additional capital to support growing business in an expensive market.

Banks that have raised debt from the local market in the last two years have paid interest rates above 10 per cent.

I&M Bank paid a fixed rate of 12.8 per cent in its Sh3 billion issue last year. Pan-African mortgage lender Shelter Afrique paid a rate of 12.5 per cent while Consolidated Bank had paid 13.25 per cent the previous year.

East African Breweries Ltd’s Sh19.9 billion loan from its UK-based majority owner Diageo in 2011 however did not come cheap.

The Kenyan beer maker has started renegotiating the terms with its parent Diageo that pegged the cost of the loan to EABL on Kenya’s 364-day Treasury bill plus 1.5 per cent premium.