Economic pressure pushing up Kenya Eurobond yields

Investors in the international markets are demanding a premium on buying Kenya’s 10-year Eurobond in the secondary market to reflect the country’s current economic struggles, a London-based analyst has said.

In an outlook report on emerging fixed income markets, investment bank Exotix Partners said the investors are reacting to the crises that has plagued the Kenyan economy this year.

The prevailing yield of 8.9 per cent compared to a coupon of 6.875 per cent has made the bond attractive to secondary market investors.

Rising yields indicate prices have fallen since the issuance (they move in opposite directions) to the disadvantage of the seller who has to discount on the initial buying price when selling their bond.

“We think Kenya at near nine per cent yields is attractive. The country has spent much of 2015 stumbling from one small crisis to the next, making it very difficult for investors to get comfortable with what would otherwise be one of Africa’s best underlying stories… investors are more sensitive to negative headlines and policy weaknesses than before,” said Exotix in the outlook report for 2016.

The Kenya economy has been under pressure this year with the shilling’s depreciation piling pressure on the balance of payments as imports become more expensive.

There have also been questions raised by politicians over the use of the Eurobond proceeds, which would potentially spook investors leading them to demand a higher risk premium on Kenyan debt issues in international market.

While the yield on offer in the secondary market has risen, Kenya is still paying interest at the coupon rate of 6.875 per cent on the bond, meaning that there is no rise in the interest payable.

READ: Kenya’s dollar-denominated debt rises in six months

New debt issues for both government and the private sector are however likely to attract rates closer to the prevailing Eurobond yield. “While the yield has risen, there is no immediate effect for the government on payment of interest. Kenya would however be forced to pay a nine per cent coupon if the country were to offer a new bond under these conditions,” said ABC Capital corporate finance manager Johnson Nderi.

According to Exotix, the higher returns demanded are not solely a Kenyan problem, but rather have been seen across the sovereign bond issues by African countries.

The firm cites recent issuances by Angola and Cameroon which carried coupon rates of 9.5 per cent, and cautions that borrowing at such levels in the international market is likely to prove unsustainable in 2016.

Going forward, Exotix sounds an optimistic note on Kenya’s economy, which has been one of the more resilient in Africa considering the country does not rely on natural resources.

“We continue to like Kenya for its investment-driven growth model, its economic diversification, and status as an oil importer in an era of lower commodity prices,” said Exotix.

The International Monetary Fund recently projected Kenya’s economy to grow at 5.6 per cent this year.