Commodities Exchange and Risk Mitigation: Options for Raising Capital

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(No Transcript)
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• Commodities Exchange and Risk Mitigation Options
  for Raising Capital
• A presentation by
• Mr. Jimnah Mbaru
• Chairman, Nairobi Stock Exchange
• Chairman, Dyer Blair Investment Bank
• 17 October 2007

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STRUCTURE OF PRESENTATION

1. Introduction
2. Structure of Nairobi Stock Exchange (NSE)
3. NSE Performance
4. Drivers of NSE
5. Role of Commodities Exchange
6. Options for Raising Capital
7. Conclusion
8. QA

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STRUCTURE OF THE NAIROBI STOCK EXCHANGE (NSE)

• Established in 1954 as an overseas stock exchange
  through the London Stock Exchange
• NSE 20-share index established in 1966 was
  managed by Dyer and Blair Ltd.
• Regulated by the Capital Markets Authority (CMA),
  which was established in 1989
• Primary (IPOS) Secondary (Trading) markets
• Part of the African Securities Exchange
  Association (ASEA), which aims to
• Establish systematic corporation,
• Enhance sharing of information
• Development of harmonized market standards.

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STRUCTURE OF THE NSE Contd

• 74 government bonds
• 53 listed companies
• 6 corporate bonds
• 7 Licensed Investment Banks
• 11 Licensed Stockbrokers
• Market trading done through
• 1954 1991 Callover System
• 1991 Aug 2006 Open Outcry System
• Since Sept 2006 Automated Trading System
• Shares are traded in lots of 100

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NSE Market Performance (A) Equities Primary
Market (Kshs Million)
Year Amount Raised Rights Issue Private Sector Privatization/IPO
1992 496.10 -  358.00
1993 62.48 -  62.48
1994 2,600.04 61.90 2,138.14 400.00
1995 124.00 -  102.00 22.00
1996 5,108.00 1,200.00 66.00 3,842.00
1997 1,944.60 1,500.00 276.6 168.00
1998 1,800.00 -  1,800.00
1999 -  -  - 
2000 997.63 619.63 378.00
2001 1,155.00 30.00 1,125.00
2002 331.21 -  331.21
2003 -  -  - 
2004 2,450.00 2,450.00 - 
2005 2,011.00 2,011.00 - 
2006 15,225.00 776.00 1,319.55 13,129.45
Sept 2007 3,080 800.00 2,280.00
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NSE Market Performance B) Equities Secondary
Market
  94 95 96 97 98 99 00 01 02 03 04 05 06 07
Turnover (Kshs Bn) 3.08 3.33 3.9 6.15 4.58 5.15 3.63 3.09 2.92 15.25 22.3 36.5 95 57.6
Volume (Mn) 43 62 114 144 112 101 142 115 149 381 625 847 1,455 1,139
Market Cap. (Kshs Bn) 137 105.5 98.9 114.3 129 107 101.4 86.1 112 318 306 463 792 739
NSE Index 4,559 3,468 3,114 3,115 2,962 2,303 1,913 1,355 1,363 2,738 2,95 3,97 5,646 5,069
Liquidity () 2.76 3.43 3.85 5.73 3.74 5.12 3.71 2.9 3.6 8.52 7.3 7.9 12 13
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NSE Index Movement (2000-2007)
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NSE Performance   (C) Bonds Primary/Secondary
Market
     
  Bonds Issued/Trades (Kshs Bn) Bonds Issued/Trades (Kshs Bn)  
    Primary Secondary
  1996 0.86 0.86
  1997 38.6 11.5
  1998 47.3 8.22
  1999 47.4 6.92
  2000 25.1 5.88
  2001 72.5 14.1
  2002 71.2 33.6
  2003 76.4 42.0
  2004 91.4 34.1
  2005 74.4 13.6
  2006 76.7 48.6
  2007 66.3 68.0

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(A) Drivers of NSE The Economy

• Vision 2030 geared towards growth

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(B) Drivers of NSE Economic Monetary Cycle
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(C) Drivers of NSE - Technology Effects
ATS Set-Up
Open Outcry
1991- Switch from Callover
CDS Activation
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(D) Drivers of NSE Low Interest Rates

• Low stable interest rates
• Low cost of funding hence high corporate
  profitability

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Explanation to the low interest rates

• Deficit financing through privatization

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(E) Other Factors influencing NSE Performance

• Increased corporate profitability
• Increased foreign exchange earnings FDI
• Diaspora remittances estimated at Kshs 75Bn per
  annum (1.2Bn)
• Increase in amounts held by institutions e.g.
  pension funds assets of Kshs 224Bn
• Increase in investment vehicles unit trusts,
  mutual funds assets of 20Bn
• Increase in market participants to over 750,000
  investors
• KENGEN

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Role of Commodities Exchange

• Facilitates offsetting commodity transactions
  without impacting on physical goods until the
  expiry of a contract
• Offers
• Price transparency
• Effective price discovery
• Efficient risk management
• Types
• Commodities Futures Exchange
• Spot Exchange
• Market players
• Producers, processors, warehouses
• Buyers, speculators
• Government, marketing agencies, banks

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Benefits to

• Farmers
• Price discovery
• Warehousing services
• Warehouse receipts as collateral for loans
• Traders
• Access to bigger markets
• Elimination of counterparty risks through
  guarantees
• Better pricing because of high number of
  participants
• Exporters
• Quality products through a secured platform
• Elimination of physical market procurement
  problems
• Elimination of procurement agents fees

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Benefits to

• End Users
• Ability to buy direct at competitive prices
• Operational comfort - easy to access information
  
• The exchange I s a single window system for
  procurement of various materials
• The Exchange
• Fair transparent prices for settlement of
  contracts
• Arbitrage opportunities for investors
• Long-term investors can buy physical commodities
  stored at warehouses and take advantage of
  off-season price rises

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Challenges for Multiple Commodities Exchange in
Kenya (MCE)

• Commodities controlled by Boards - heavily
  regulated
• Many small-scale producers- challenge on
  stability of client base
• In an environment of struggling institutions
  cooperatives
• Inefficiencies and mismanagement
• Internal bureaucracies on elective posts and
  decision making process
• Conservative approach
• Partial liberalization of some commodities
  sectors (coffee)

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Options for Raising Capital (Players)

• Private Equity/Capital
• Private equity fund
• Syndicated
• Initial public offer - IPO
• Demutualized commodities exchange
• Nairobi Stock Exchange (NSE)
• Over The Counter (OTC)
• Listing Requirements
• Corporate bonds
• Plain vanilla bonds

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Options for Raising Capital (Players)

• Securitization
• Commodities receipts backed bonds
• Fees receivables backed bonds
• Syndicated loans
• backed by physical commodities (Coffee exchange
  practice)

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Role Of Government In Setting Up The Exchange

• One-off grant to start (Kshs 1 billion)
• Reforms in the producer sector
• Exchange income tax exempt until demutualized
• Provide warehousing (Subsidized)
• Plan a regulatory body for commodities

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Conclusion

• Possible to raise funds through NSE
• Reforms essential for successful MCE in Kenya
• MCE way forward
• Government cooperation and support essential

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Q A

• THANK YOU

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10th Floor, Loita House, Loita Street P.O.
Box 45396-00100 Nairobi, Kenya Tel
254-2-3240000 Fax [phone]
Website www.dyerandblair.com