Kenyan companies looking to raise capital face a tough year as high interest rates push up the cost of borrowing, with analysts warning that rising political risks could force firms to postpone their offers or seek alternatives.

Transaction advisors said those companies looking at the bond market may have to wait until the second half of 2012, when interest rates are expected to fall.

"A number of bond issuers have been on the sidelines of the bond market because of the high interest rates. But we expect to see transactions in the second half of the year," said Maurice Opiyo, an analyst with NIC Capital.

In the past one year, interest rates in Kenya have risen sharply, with rates on the benchmark 91-day government Treasury bill rising from 2.5 per cent a year ago to 19.905 in January 2012.

Consolidated Bank and Housing Finance are among several companies, that pushed forward their bond offers from last year, citing rising interest rates in 2011.

Housing Finance opted to borrow from international institutions, instead of issuing the second tranche of their bond.

Frank Ireri, managing director of Housing Finance said they should have the funding by the second quarter of this year.

He said the bond offer was pushed because borrowing at the current high interest rates would not allow them to keep their mortgage rate for existing borrowers at 15.5 per cent.

Consolidated Bank had plans of an initial public offering by the end of 2011 to raise capital, but government approval seems to have taken longer than expected, forcing it to turn to the bond market.

Japheth Kisilu, a general manager at Consolidated Bank, said they postponed the $47 million bond offer because the high interest rates in the fourth quarter of 2011 were not favourable. The bank said it will look at borrowing the funds, meant to bolster its capital base, 1n 2013.

The high financing costs would have eaten into the companies profit margins.

"When you borrow at the current rates then your business should be earning way above the interest rates. At the current rates it means the business has to be earning above 20 per cent returns," said James Murigu, an executive director at Metropol East Africa.

According to Mr Murigu, a benchmark interest rate of 10 per cent would be more sustainable to attract business to raise corporate bonds. Companies have either opted for rights issues or turned to their anchor shareholders for financing.

Kenya Airways and CFC Stanbic Bank are expected to raise funds through a rights issue this year and this will be a test of shareholders' appetite for shares.

The airline and the bank are looking for cash to aid their expansion plans. But the two are faced with the challenge of pricing their offers since share prices have dropped in trading at the NSE, meaning that the rights issues might be heavily discounted. KQ's shares declined by 55 per cent in 2011 and CFC Stanbic's shares were down 47 per cent.

Stanchart said it is weighing options on how to raise funds in 2012 to bolster its core capital.

"The best thing to do right now is to seek equity financing. Who is going to lend to you right now? Banks would rather lend to themselves in the interbank market. The only reason the government has been able to borrow is because the banks, insurance firms and fund managers have to meet some regulatory requirements," said Johnson Nderi, a research analyst with Suntra Investment Bank.

Some analysts said companies might prefer issuing a bond as opposed to selling shares, through an IPO or a rights issue, because of the faster and less rigorous approval process. Still, the uncertainty in the direction of interest rates in 2012 clouds bond issuers. Also, there is the political risk with the country headed for a general election expected in the second half of 2012.

Considering that some of the corporate bond issues are pegged a few percentage points above the prevailing interest rate on Treasury bills, if a company issues a corporate bond today, it must pay an interest rate higher than 18.9 per cent to attract investors, making a bond issue an expensive capital raising avenue.

Safaricom, PTA Bank, Barclays Bank and Mabati Rolling Mills are some of the companies that, having previously issued corporate bonds pegged to the interest rates charged on Treasury bills, now have to incur higher financing costs.