Unga Group faces higher borrowing costs on Central Bank Rate increase

Unga Group is facing higher financing costs in the wake of the weakening shilling and the rise in the Central Bank Rate (CBR), which serves as the base for the pricing of some of its borrowings.

The company and its subsidiaries had taken loans—priced on the CBR plus a margin of three to 3.1 percent—amounting to Sh1.1 billion as of June 2023, according to its latest annual report.

The CBR has risen from 10.5 percent last June to the current 12.5 percent, significantly raising the cost of borrowing on loans priced off the Central Bank of Kenya’s benchmark rate.

“Bank facility comprises a six-year term loan of Sh860 million taken in 2017 to finance the purchase and construction of a new wheat milling plant in Eldoret,” Unga says of a facility from Absa Bank.

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“Interest charged is Central Bank Rate…plus three percent margin. The loan is repayable in equal instalments after the end of the moratorium of 12 months. The entire loan had been drawn down as of June 30, 2022.”

The human and animal feed processor had also taken two loans—Sh137.8 million and Sh106.8 million— from NCBA Bank, which have an interest rate of CBR plus a 3.1 percent margin each.

The CBK raised its benchmark rate last month to the current level from the previous 10.5 percent in a bid to stem the slide of the shilling against hard currencies.

The weakening of the shilling—by 22 percent against the US dollar in the past 12 months alone—has also contributed to higher finance costs for Unga.

The Nairobi Securities Exchange-listed firm has liabilities in other currencies, including the dollar, which the depreciation of the shilling has inflated.

“The situation was further compounded by the sharp depreciation of Kenya shilling against key currencies, which lost ground by over 15 percent supply against the USD and GBP (pound sterling),” said Unga chief executive Joseph Choge in a review of the year-ended June 2023.

“Furthermore, dollar supply constraints within the market led to margin erosion, high forex losses, and increased interest expenses.”

The company’s total finance costs nearly tripled to Sh784.3 million in the review period from Sh267.4 million a year earlier.

The higher interest expenses also reflected a jump in borrowings to Sh1.07 billion from Sh493 million.

Unga is among the companies grappling with higher finance costs in the context of a weakening shilling and rising interest rates.

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Others include Car and General, Kenya Airways, Kenya Power and TransCentury. Other companies like Centum Investment Company Plc have moved to aggressively pay down their debt to avoid steep finance costs.

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