Treasury plans negotiations to delay payment of syndicated loan

The Treasury is considering negotiating with a group of international banks to delay repayment of its $600 million (Sh52 billion) syndicated loan by three years, in a move that could cost the taxpayers more in interest payments.

The government had indicated that it would spend part of the proceeds from the upcoming Eurobond issue to repay the syndicated loan, which is due having been borrowed in 2012.

Treasury secretary Henry Rotich has revealed the plans to extend payments in the Medium Term Debt Strategy (MTDS) 2014.

“It is envisaged that the syndicated loan will be repaid with proceeds of the Eurobond. However, the government is exploring the possibility of rolling over the syndicated loan three years,” says Mr Rotich. Postponing payment of the facility will stretch it up to 2017.

The MTDS guides the government on the best borrowing strategy by comparing cost and risk characteristics of existing public debt and alternatives.

The government is planning to raise as much as $2 billion (Sh172 billion) through the country’s first Eurobond and use proceeds from the bond sale to pay off the syndicated loan, which is a more expensive form of debt than the bond.

The balance after paying the syndicated loan is to be used to plug the Sh330 billion deficit and finance infrastructure projects.

The loan was underwritten and arranged by Citigroup, Standard Bank and Standard Chartered and was bought by 13 banks.

Extending the loan’s repayment period is expected to increase interest payments and put some pressure on government’s resources due to increased rates in the market.

The loan was priced at 4.75 percentage points above the London interbank offered (Libor) rate.

“The Libor has gone up slightly since then (2012),” noted Eric Musau, a research analyst at Standard Investment Bank.

Analysts also said that rollover could indicate a possible delay in issue of the sovereign bond, though the Treasury did not indicate this.

Other analysts said the government could be seeking to use the Eurobond cash for more urgent needs.

“It could be that they want to direct the funds they would have paid off the debt to other capital projects,” said Agnes Achieng, a research analyst at Sterling Capital.

Rolling over the debt and adding more debt will see the country take a step towards the limit set by Parliament.

“Kenya’s parliament had revised the external public debt ceiling to Sh1.2 trillion ($14.1b billion). Regrettably contingent liabilities will rise due to the implementation of the new devolved government (created by the 2010 Constitution) as county government liabilities pile on,” says a fixed income guide by African Alliance.