Centum pays dollar loans to cut costs over a weak shilling

James Mworia, the Centum Investment CEO. PHOTO | JEFF ANGOTE | NMG   

By CHARLES MWANIKI More by this Author

Investment firm Centum plans to pay its dollar-denominated loans in the near term to avoid rising finance costs on hard currency debt amid the weakening of the Kenya shilling.

The loans due for repayment include $10 million (Sh1.22 billion) in borrowings held by the listed firm and the dollar component of a loan of Sh5.5 billion ($45 million) credit facility taken up by its real estate unit Centum Re in 2020.

The Centum Re facility, which has an outstanding balance equivalent to Sh3 billion, comprised a $9 million (Sh1.1 billion) priced at three months Libor rate plus 5.75 per cent per annum, and a Kenya shilling equivalent of $36 million (Sh4.4 billion) priced at Central Bank Rate plus four per cent per annum.

"Pay down USD-denominated debt and mitigate forex risk exposure," Centum said in a statement.

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The company's chief executive James Mworia told Business Daily that the loans will be repaid from a mix of proceeds from transactions and cash generated from ongoing operations of the businesses.

Centum has taken the decision to repay the loans rather than seek refinancing due to the weakening shilling amid rising dollar loan rates globally.

The firm said it is also expensive to hedge (against higher rates), hence it is better to retire the debt.

Dollar loan rates have gone up this year after the US raised its base lending rate to combat rising inflation, which has touched a four-decade high this year.

The US Federal Reserve has in a series of hikes raised its benchmark rate to a 14-year high of 3.75-4.0 per cent, while the benchmark US 10-year bond rate — a closely watched gauge of market inflation expectations over the next decade — has climbed to 3.51 per cent, up from 1.52 per cent at the start of the year.

Local companies such as Kenya Power, KenGen and Safaricom and most large banks carry significant exposure to currency rate risk, owing to significant dollar borrowings from external lenders and development finance institutions to finance capital expenditure, and in the case of banks for on-lending to customers.

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These dollar borrowings are largely on floating terms that were formerly pegged on the expiring Libor rate—which will fully shift by June 2023 to new pricing benchmarks such as the Secured Overnight Financing Rate (SOFR) that has been adopted to replace the US dollar Libor.

They are, therefore, facing higher finance costs as a result of the higher global dollar facility rates.

They would also face demands for higher interest payments from lenders were they to roll over the debt using similar US dollar facilities.

These loans are repaid and serviced through dollars bought from the local market, which is subject to exchange rate fluctuations.

This year, the shilling has depreciated against the US currency by 7.9 per cent, exchanging at an average of 122.80 units on Friday from 113.14 at the beginning of the year.

Firms have also faced problems accessing dollars in the local market to make overseas obligations which include payments to suppliers, dividend remittances and loan repayments.

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