Safaricom and SMEs

Welcome to this week’s edition of Frank Digest!

Your Weekly Brief on all things Finance and Investing. Quick, Enjoyable Reads for Busy Professionals in 5 minutes or Less.

Topics this week:

• Understanding Safaricom’s Interest for Birr Denominated Corporate Bonds

• SMEs and the Stock Market

Thanks for reading!

Corporate Bonds: Are We Likely to See Them on ESX?

Corporate Finance

Nobody:
Absolutely no one:
Safaricom Ethiopia PLC: We’re going to issue corporate bonds

Well Frank Digest is always on the lookout and we come to you to shine a light on bonds, specifically debentures. Debenture is a debt instrument issued by corporations that is not backed by any collateral and depends on the issuer’s creditworthiness ranked by an official rating agency.

Debentures usually are long term instruments (10 years or more) that pay periodically fixed interest (coupon) and repay the principal loan upon maturity. The revised Ethiopian Commercial Code of 2021 allows for share companies that have been in operation for at least 1 year to issue debentures up to a maximum value of its paid-up capital.

Why is Safaricom opting for locally denominated (ETB) bonds? For starters it carries a longer maturity timeline relative to bank loans. More importantly, it is a hedge against currency devaluation. Safaricom’s earnings are in ETB and let’s say it took loans denominated in USD, this would add pressure on repaying the loans in the event of a sudden devaluation, or even a gradual one for that matter. In just the past 5 years ETB to USD devalued by 103%.

So how would they be interesting for investors?

• Safer than owning shares- in the event of bankruptcy debt has seniority over equity

• Regular periodical interest payments

• Pay a higher interest rate than bank saving rates or T-bills (9.81%)

• If issuer allows, may be converted to equity after a specific period

What are the drawbacks for investors?

• The interest rate is fixed- this might make them relatively less appealing in the event that the National Bank of Ethiopia (NBE) raises T-bill rates

• Not the most appealing instrument in a high inflationary economy as the real value of coupon payments plus principal are eroded over time

However, with the introduction of the Ethiopian Stock Exchange (ESX), debentures can be a liquid instrument since they can be traded on the secondary market. 

Corporate bonds such as debentures are more likely to break the ground on ESX rather than share offerings (IPO). This would be particularly appealing to existing Foreign Direct Investments such as Safaricom, Dangote, Unilever, etc. that face capital repatriation hurdles.

Is the Stock Market Suitable for Small and Medium Enterprises?

Banking

In the world of finance, the stock market has long been seen as a platform for large corporations and ዲታ individuals to trade and invest. But is it the right place for Small and Medium Enterprises (SMEs) to be listed? It is important to consider 2 things:

• Regulatory compliance that comes with being publicly traded

• Opportunities in private markets and bank loans

Regulatory compliance is in place to protect investors and ensure transparency in the market. SMEs looking to enter the stock market will need to adhere to regulations set forth by the Ethiopian Capital Markets Authority (ECMA). The regulations will cover a wide range of areas including financial reporting, corporate governance and disclosure requirements.

SMEs should carefully evaluate the costs and resources required to meet these compliance requirements. This may involve:

• Hiring additional staff

• Implementing new financial reporting systems, and

• Engaging legal and financial advisors to ensure full disclosure

Non-compliance can result in severe penalties, damage to the company's reputation and stock price መዋዠቅ. The advantage to being publicly listed is the liquidity afforded to your shareholders which they can use as collateral to access loans or sell at the market clearing price if they need cash.

Alternatively, SMEs may consider private markets, which are less liquid for shareholders but can offer several benefits for the company compared to the public stock market. Private market includes equity offerings or loans.

Although accessing loans with interest from individuals or companies outside of banks is currently restricted in Ethiopia, one of the advantages of private markets is the ability to raise equity from a select group of investors without the regulatory requirements and extensive disclosures associated with going public. This can provide SMEs with more flexibility and control over their fundraising efforts.

Additionally, private markets may offer a longer-term approach to investment, allowing SMEs to focus on growth rather than short-term financial performance.

The right Private Equity (PE) investors offer valuable mentorship, industry connections, and expertise that can contribute to the sustainable growth of the business. Global trend also seems to be moving towards private markets as we see less and less Initial Public Offering (IPO) in developed economies.

Catch next week’s article for more on private markets!