East African Breweries Limited (EABL) #ticker:EABL has pegged a Sh11.4 billion loan from its parent firm Diageo Plc on the Kenya Bankers’ Reference Rate (KBRR) which was discontinued last year, putting the pricing of the debt in limbo.
The firm, listed on the Nairobi Securities Exchange #ticker:NSE, says in its latest annual report for the financial year ended June 2017 that the loan attracted an interest charge of two percentage points above the KBRR.
The usage of the KBRR as a signalling rate was however discontinued by the Central Bank Kenya (CBK) in January this year after the signing into law of interest rate controls based on the Central Bank Rate (CBR).
The brewer in the previous year paid interest to Diageo, through the UK multinational’s subsidiary Diageo Finance Plc, at 1.5 percentage point above the 364-day T-bill rate.
“The related party loan issued in 2012 attracts variable interest rates at two per cent above Kenya Bankers’ Reference Rate (KBRR) (2016: 1.5 per cent above the 364 day Treasury Bill rate),” EABL said in the report.
Impact of new law
The brewer did not say what impact the KBRR’s suspension — in the middle of the financial year— had on the revised loan terms.
KBRR was last set at 8.9 per cent, indicating that the brewer was paying interest on the loan at 10.9 per cent in the review period.
While the banking sector regulator may have suspended KBRR for official use, non-bank private parties could adopt it to price credit among themselves since all the inputs are public information incorporating benchmark risk-free rates.
KBRR is computed as an average of the CBR and the two-month weighted moving average of the 91-day T-bill to capture the monetary policy stance and the minimum return respectively.
EABL took the Diageo loan in 2012 to regain full ownership of its subsidiary the Kenya Breweries Limited by buying out the 20 per cent stake held by rival SABMiller at the time.
Interest expense on the loan and other debt stood at Sh3.2 billion in the year ended June, dropping from Sh3.5 billion the year before.
