Markets & Finance

State seeks to bridge budget deficit with Sh45bn Eurobond

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Treasury building. A decline of Government borrowing from domestic sources reflects shift to external lenders through sovereign bonds . File

Kenya will start preparations to issue a Sh45 billion ($500 million) Eurobond by next month when it seeks credit rating, joining a string of other African countries planning to raise funds through the sovereign notes.
By January 2012, the Government will also have begun identifying the partners for the actual rollout of the issue later in the year.
The overseas funds are expected to ease pressure on the local credit market from where the government is set to raise about half of the amount required to bridge the 2011/12 budget deficit.

“The ministry is probably going to go for credit rating with Standard & Poor’s and Fitch by next month. July is the month we start the credit rating before we start the rest of the preparation later in the year or by January next year,” said Mr John Murugu, director of debt management department at the Treasury.

Preparations to identify the arranger of the bond would be on by January 2012 although, he said, a change in plan was possible since the year also includes preparation for the General Election and the provision for the bond was “only tentative.”

In 2009, the government had identified arrangers for the bond as Barclays Capital and Deutsch Bank, but Mr Murugu said that the government would sit again to decide whether to retain them or float a new tender. This would be among the issues to be discussed by January next year.

The government is keen on what it calls “realistic domestic interest rate” to be achieved by borrowing overseas rather than domestically.

“It should also be noted that the sharp decline in domestic borrowing over the medium-term reflects a proposed substitution of borrowing from domestic sources to external sources through the issuance of a sovereign bond in 2012/13, market conditions permitting. Accessing external capital market through issuance of sovereign bond is consistent with the objective of ensuring realistic domestic interest rates,” said Treasury in a budget analysis document.

Kenya also hopes to provide a benchmark for corporate firms to borrow overseas rather than depend entirely on the limited funding from local institutions. The dominant Eurobond type issued by most African countries has a tenure of 10 years with coupon rate ranging from Nigeria’s 6.75 per cent to Senegal’s 8.75 per cent.

Analysts think that Kenya may have to pay a significant premium for the sovereign bond because of the fact that 2012 is an election year while its budget deficit has been rising and stands at 7.4 per cent for the 2011/12 fiscal year, up from 6.5 per cent in the fiscal year just coming to a close.

“Kenya is likely to be asked to pay a premium if it issues the eurobond next year. We have elections on the way, the deficit and public debt,” said Alexander Muiruri, a fixed-income dealer at African Alliance Investment Bank.

He said the Ghana bond, issued in 2007, is trading at 500 basis points above the London Interbank Offered Rate, which is now at 0.73 per cent for the one-year rate.

Mr Muiruri said that the Greek debt problems in Europe had clouded the outlook about demand for such paper unless significant premium was loaded into the issue.

Senegal issued its $500 million 10-year bond last month at a coupon rate of 8.75 per cent against a rating of B1 by Moodys and B+ by S&P. Kenya received a similar B+ rating by S&P at the end of last year.

Ghana is paying 8.5 per cent yield on a $750 million 10-year eurobond due in 2017 while Gabon eurobond was issued at 8.2 per cent coupon rate.

Angola has also announced that it will seek $500 million in September this year, a figure that is lower than the earlier $4 billion bond it first announced in 2009.

In January this year, Nigeria also issued its debut 10-year bond to raise $500 million at a coupon rate of 6.75 per cent and it was more than 2.6 times oversubscribed. The country issued the note not so much because it needed the cash but to serve as a benchmark for the corporate sector.

South Africa already issued in March 2010 a Eurobond for $2 billion.

Several other African countries that plan to follow suit in issuing Eurobonds including Zambia, Tanzania and Uganda.

In an interview earlier this year, Razia Khan, head of research for the Africa region at Standard Chartered, said the Kenya Eurobond was likely to become increasingly relevant at a time when revenue receipts have been underperforming.

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