Sovereign bond money to pay off international debt

The Treasury plans to borrow money through a sovereign bond to settle all or part of the Sh52 billion ($600 million) syndicated loan sourced from international banks, Finance minister Njeru Githae has said.

Mr Githae said on Tuesday that the Treasury had opted to take a syndicated loan as a stop-gap measure to give it time to plan on the floating of the bond, which takes a longer time to conclude.

“Our plan is to retire the loan on or before its term of two years through issuance of a sovereign bond,” he said.

In a letter of intent sent to the IMF in March, the Finance minister and Central Bank of Kenya (CBK) governor, Njuguna Ndung’u, had indicated the government intends to issue a sovereign bond of up to Sh66 billion ($800 million) in the next fiscal year.

The government preference to issue a bond could be intended to reduce costs of servicing public debt as it is cheaper compared to a bank loan.

“Unlike sovereign bonds, which have a liquid secondary trading market, loans are typically held by banks on their balance sheets. This relative illiquidity means that the pricing of the loan is normally higher than that of bonds,” said Mr Githae.

The officials also committed themselves in the letter not to go beyond a total of $1.5 billion in external commercial debts, including mainly the syndicated loans and the sovereign bond. The two types of loans, if issued, would total $1.4 billion — marginally below the commitment levels.

Kenya initially planned to issue the sovereign bond two years ago and even identified arrangers including Barclays Capital and Deutsch Bank.

By mid last year, the plan was still in place but as the year closed and raising cash from the domestic markets became difficult, attention shifted to a quicker solution in the form of a syndicated loan.

“We still intend to do a sovereign bond. This was quicker but we can start negotiating now that we have time,” said Mr Githae.

Mbui Wagacha, a consultant economist, said that the government’s decision to take up a loan and replace it with a bond in future could reflect optimism over the country’s long-term economic position.

“Right now central banks in European markets have pushed their rates down as they attempt to revive their economies so it makes sense to borrow internationally. However, in the medium-term Kenya could be in a much better position to borrow locally or raise a bond with a better credit rating,” said Dr Wagacha.