The rise in the Treasury bill rates to an eight-year high is exposing companies that have taken out loans pegged on the rate to high finance expenses, raising their cost of doing business in an already challenging economic environment.
Floating rate facilities issued to local firms are usually priced based on the rates on Treasury bills as a base before adding a margin while others use the Central Bank of Kenya's base rate as the benchmark for costing facilities.
In the last week's auction, the yield on the 364-day paper went up by 49 basis points to 15.22 percent, the highest seen since November 2015.
The rates for the 182-day and 91-day T-bills are just shy of the 15 percent mark, at 14.94 percent and 1479 percent respectively.
A year ago, the three tenors had yields of between 8.9 and 9.9 percent, meaning that the effective interest rates on facilities pegged on the securities have increased by up to six percentage points.
The CBR was raised by a percentage point to the current 10.5 percent at the end of June, which has gone up steadily from seven percent in March 2022. The cost of facilities has been influenced by this, resulting in a steep rise in the cost of services.
The listed firms EABL, Crown Paints and Centum have made recent disclosures of facilities whose interest is pegged on T-bills and the CBR.
As at the end of June this year, EABL held four loans with local banks pegged on the 91-day and 182-day papers, totalling Sh26.3 billion.
The facilities, which will mature between September 2023 and June 2030, have premiums of 1.5 percent and 2.45 percent on the Treasuries.
The brewer also reported a facility worth Sh3 billion whose rate is the CBR plus one percentage point.
Crown Paints, in its annual report for 2022, disclosed that by the end of last year, it held short-term borrowings with KCB and NCBA totalling Sh521.7 million to cover import financing that was priced at the rate of the 91-day T-bill plus 1.5 percent.
The new facilities were due to be finished by June.
Centum Group also revealed in its annual report for the year ending March 2023 that its subsidiary Longhorn Publishers holds a Sh762.7 million loan with Standard Chartered Bank Kenya that is priced at CBR plus four percent.
However, it does not only affect those with a direct rate peg, but the overall cost of credit in the economy tending to go up in tandem with that of the securities because of the cost of money for banks.
Banks use a base rate that is usually the cost of funds, along with a margin and a risk premium to determine how much they charge a particular customer.
When T-bill rates go up, banks raise deposit rates to attract customer deposits and remain competitive in comparison to other investment assets, and then pass on the additional cost to borrowers.