Companies who have taken out loans based on the rate are exposed to high finance expenses as a result of the increase in Treasury bill rates to an eight-year high, increasing their cost of doing business in an already difficult economic situation.
While some utilize the Central Bank of Kenya’s base rate (CBR) as the peg for costing facilities, many floating rate facilities given to local businesses are priced using Treasury bill rates as a base before adding a margin. The yield on the 364-day paper increased by 49 basis points to 15.22 percent at this week’s Treasury bill auction, which is the highest since November 2015.
With rates of 14.94 percent and 14.79 percent, respectively, the 182-day and 91-day T-bills are just shy of the 15 percent threshold.
The three tenors’ yields last year ranged from 8.9 to 9.9 percent, which means that the effective interest rates on facilities tethered to the securities have increased by as much as six percentage points.
The CBR increased by one percentage point at the end of June, bringing it from seven percent in March 2022 to the present 10.5 percent. The price of amenities that are pegged to the rate has increased as a result of this. Among publicly traded companies, EABL, Crown Paints, and Centum recently disclosed the existence of facilities with interest based on T-bills and the CBR.
According to EABL’s 2023 annual report, as of the end of June this year, it held four loans totaling Sh26.3 billion with local banks that were tethered to the 91-day and 182-day papers. The facilities have premiums on the Treasury bonds ranging from 1.5% to 2.45%, and they mature between September 2023 and June 2030.
In its annual report for 2022, Crown Paints stated that as of the end of the previous year, the company had Sh521.7 million in short-term borrowings with KCB and NCBA to cover import finance that was priced at the rate of the 91-day T-bill plus 1.5 percent. By June, the amenities had to be finished.
In the meantime, Centum Group revealed in its annual report for the year ending March 2023 that its subsidiary Longhorn Publishers had a loan with Standard Chartered Bank Kenya for Sh762.7 million which is priced at CBR plus 4%.
However, because of the aspect of the cost of money for banks, the effect of increasing T-bill rates does not simply affect those with a direct rate peg; rather, the general cost of credit in the economy tends to increase along with that of the securities. To calculate how much to charge a specific customer, banks add a margin and a risk premium to their base rate, which is often the cost of funds.
Banks increase deposit rates in response to rising T-bill rates in order to draw customer deposits and maintain their competitiveness with other investment assets. They subsequently pass the increased cost to borrowers.
