Editor’s note: This is general educational information about how trustee arrangements work for corporate bonds offered and listed in Kenya, drawn from the official rules and exchange documents listed at the end. It is not investment advice and does not describe any particular issue or issuer.
Analysis: the covenant package is private, the disclosure is public
The design puts the enforceable promises in a document the regulations barely specify and puts the verifiable facts in documents that must be filed. That produces a predictable asymmetry. Two Kenyan bonds can carry identical statutory declarations of trustee independence and completely different remedies, because gearing tests, grace periods, cross-default triggers, information deadlines and the majority needed to waive a breach all live in the deed. The Regulations require the deed to be submitted to the Authority, not published in full, so a reader’s practical access to the covenants runs through whatever the information memorandum chooses to summarise under paragraph 11.22 and its neighbours.
The eligibility schedules are therefore doing more of the protective work than the trust deed is. A four times liabilities to shareholders’ funds ceiling at the point of issue, a profits test across two of three periods and a requirement not to be in breach of existing loan covenants are hard, checkable conditions. They are also point-in-time conditions. Nothing in the Schedule requires the ratio to hold for the life of the bond; that continuing obligation, if it exists, exists because someone wrote it into the deed.
The independence test is the weakest link, and it is weak by construction. It asks whether the issuer controls the trustee and takes a declaration on the point. It does not address the more common shape of the problem in a market this size, where the trustee, the arranger, the receiving bank and a large holder can all be parts of the same banking group without any of them controlling the issuer. A careful reader would look for the trustee’s identity and group ownership, the conditions under which the trustee may be replaced, which the schedule requires the memorandum to disclose, the subordination summary, and whether the memorandum quantifies the covenants or merely names them. Where the covenants are named but not quantified, the deed is doing work the reader cannot check.
What the documents say
A Kenyan corporate bond is a contract between one borrower and a crowd. The crowd is not organised, and its individual members hold positions recorded electronically in the central depository rather than certificates they can wave at a boardroom. The rulebook that makes the crowd into a counterparty is the Capital Markets (Securities) (Public Offers, Listings and Disclosures) Regulations, 2023, and the party it installs to act for the crowd is the trustee. What the trustee must do, and how thinly the regulations specify it, decides how much a covenant package is actually worth.
When a trustee is compulsory, and when it is optional
The Second Schedule to the Regulations governs public offers of fixed income securities and listing on the main fixed income securities market segment. It says an issuer shall appoint a trustee to represent the holders of its listed debt securities where there is any security or enhancement for the fixed income security, and may do so in any other case. That is the first fact most summaries get wrong. For an unsecured, unguaranteed issue the trustee is permissive rather than mandatory under the Schedule, and the market convention of always appointing one is convention, not compulsion. The exchange states its own listing requirement more firmly, describing an independent trustee registered with the Capital Markets Authority and a trust deed executed before listing.
Where a trustee is appointed, the Schedule prescribes very little about who it can be. The trustee shall be a body corporate and shall be comprised of professionals with relevant and sufficient understanding of the capital markets. Independence is handled by declaration rather than by structural tests: the issuer must ensure it has no interest in or relation to the trustee that could conflict with the trustee’s role, taking into account whether it controls the trustee, and the trustee must issue a statutory declaration that it is independent of the issuer. The disclosure schedule for debt information memoranda repeats the point, requiring a statutory declaration from the trustee confirming independence from the issuer and any other party in the transaction and confirming that it understands its responsibilities as set out in the trust deed.
The deed itself must reach the Authority, and the Regulations set a floor for its contents that is short enough to quote in full. The trustee or security trustee must ensure it has the ability and powers to perform all of its duties as set out in the deed, and the issuer must promptly notify the trustee when it becomes aware that an event of default, enforcement event or other event causing acceleration of principal has occurred, or that any condition of the deed cannot be fulfilled. Everything else in a covenant package is a matter of negotiation between issuer and arranger.
What the eligibility rules already fix before any covenant is drafted
The schedules do more prudential work than the deed does. For the main segment the issuer must be a body corporate incorporated or registered in Kenya that has been in business operations for at least 5 years, with issued and fully paid up share capital of fifty million shillings and net assets of one hundred million shillings before the offer. It must have declared profits before tax in at least two of the last three financial periods. Total liabilities including the new issue shall not exceed four times the level of shareholders’ funds. Audited statements must comply with IFRS and cover an accounting period ending not more than four months before the offer date. At the date of application, the issuer must not be in breach of any of its loan covenants.
The issue must be at least four hundred million shillings, with a minimum subscription of ten thousand shillings, and the exchange requires a minimum of 100 bondholders. The SME fixed income segment lowers the bars deliberately: 2 years of operations, ten million shillings of paid up share capital, twenty million shillings of net assets, and an issue between twenty million and four hundred million shillings, with the same four times gearing ceiling and the same trust deed provisions. Proceeds in both cases sit in a trust account at a receiving bank independent of the issuer until the securities are credited to buyers’ CDS accounts.
Rating is not compulsory. The issuer may be rated by a credit rating agency licensed or recognised by the Authority, and where an offer is rated the information memorandum must carry a cautionary statement that a credit rating is not a recommendation to apply for the securities on offer, and that the rating is only one of the considerations in a decision. The exchange lists the main segment issuances as medium term note programmes from Family Bank, Kenya Mortgage Refinance Company, Linzi 003 Infrastructure Asset-Backed Securities, East African Breweries and Safaricom.
Where enforcement actually happens
Holders vote through the depository record. Client securities accounts are maintained by central depository agents and kept segregated from the agents’ proprietary accounts, and the depository updates positions in real time from the exchange’s automated trading system, so a record date for a bondholder meeting resolves to depository data rather than to a paper register. The disclosure schedule also requires the memorandum to state the legislation under which the debt securities were created and the courts competent in the event of litigation, and to summarise any clauses subordinating the loan to other debts already contracted or to be contracted. Those two items, read together, tell a holder where a dispute would be heard and where it would rank when heard.
The Capital Markets Act supplies the regulator behind all of this. Its stated objectives include the protection of investor interests and the facilitation of a compensation fund to protect investors from financial loss arising from the failure of a licensed broker or dealer to meet contractual obligations. The wording is narrow and worth reading twice: the fund addresses intermediary failure, not issuer default. A bondholder whose issuer stops paying is outside it.
