Treasury makes Sh9bn third payment for Eurobond interest

The Treasury last week paid Sh9.1 billion as the third interest instalment for the Eurobond as yields in the secondary market remained high over local political controversy.

The government normally has 15 working days to settle interest payments from the date they fall due or risk being in default.

The five-year bond attracts a 5.875 per cent interest while the 10-year has 6.875 per cent return. Holders of the five-year bond were expected to receive Sh2.2 billion with Sh6.9 billion paid out for the ten-year tenor.

“Interest payment is semi-annually. Since 2014 we have paid three times,” said the Treasury secretary Henry Rotich.

This means the country has paid out approximately Sh27 billion in the three instalments which is equivalent to 10 per cent of the total sum raised from the bond.

The debut Sh200 billion Eurobond was issued in June last year with the government tapping an additional $750 million (Sh75 billion) in December through a secondary issue.

Economic slowdown, political clamour and the recent increase in the US Federal Reserve rate has seen investors in international markets demand a premium on buying Kenya’s 10-year Eurobond in the secondary market.

The bond is currently offering a yield of 8.9 per cent compared to the 6.875 per cent coupon rate. This means its value has dropped given the inverse relationship between price and interest rates.

“The most attractive trade right now is the Kenya 10-year Eurobond which has traded off and now offers a 9 per cent plus yield. That looks like a no-brainer’’ said Aly Khan Satchu, chief executive of data firm, Rich Management.

Controversial

Spending of the bond proceeds has raised controversy with claims of corruption and diversion of funds. The Treasury has been hard-pressed to show the specific projects funded by cash to counter corruption claims.

Mr Rotich reneged on his promise to release a list of the projects arguing it was difficult to trace the cash once it was lumped up with other government funds and allocated to different ministries.

READ: Rotich now says Treasury has no list of Eurobond projects

ALSO READ: Eurobond debacle: Why Treasury’s account raises credibility questions

Critics also dismissed the claim that Sh16 million was earned as interest from the American bank JP Morgan where the cash was deposited before it was repatriated into the country.

Interest yields in the US are low with the Federal Reserve rate having been held at zero since 2006 as the American government sought to stimulate economic growth after the global financial crisis.

An increase in local interest rates during the year that was attributed to government appetite for funds during a cash crunch fuelled questions on whether the Eurobond had met its purpose of saving the country from high interest rates regime.

Treasury bills rates shot to 23 per cent in October from 11.5 per cent a month earlier resulting in commercial banks also raising the interbank rate to highs of 27 per cent.

Analysts expect interest rates to rise again next year as most of the debt taken by the government during the high interest rate regime was short term and matures before end of march.

“Most of these borrowings are short-term instruments that mature within the current fiscal year and the government will face pressure in refinancing the obligations as they mature,” said Cytonn Investments.