Kenya could pay less for eurobond, says S&P official

Kenya can access funds from the international markets at a lower cost than Rwanda’s recent eurobond issue, a senior official at international ratings agency Standard and Poors (S&P) has said.

Rwanda last month issued a $400 million (Sh34 billion) Eurobond that attracted heavy over-subscription of $3.5 billion helped by massive global liquidity and international investors’ thirst for yields higher than those available in developed economies. It got the money at a rate of 6.875 per cent.

“Investors are looking for yields around the world. Kenya can also float a eurobond and get yields such as Rwanda’s or even better depending on the market situation,” said Konrad Reuss, the S&P head for Sub-Saharan Africa.

S&P is among international agencies that assess Kenya’s credit rating, a pre-requisite for any country seeking access to the eurobonds market.

Latest Central Bank data shows the cost of servicing Kenya’s domestic debt of Sh1 trillion rose 38 per cent to Sh90 billion between June 2012 and May 2013, making it more urgent for the Treasury to source for cheaper financing.

The Treasury has had plans to issue a $1 billion eurobond, which has, however, been pending for more than six years now.

Though it may come at a cheaper interest rate, a eurobond has the inherent risk of foreign exchange fluctuations, which could erase gains made by borrowing at a lower rate.

Other than Rwanda, other African countries that have recently tapped into international markets include Gabon, Ghana and Nigeria.

Mr Reuss said Kenya’s economic vulnerability is its wide current account deficit, which has hovered between eight to 10 per cent of the GDP.

He added that the budget deficit, especially with the implementation of the Constitution and fiscal decentralisation (devolution), is also a point of concern.
Other analysts backed the prediction that Kenya can issue a similar eurobond at a slightly lower yield than Rwanda.

A Kenya bond would also have the advantage of being included in the JP Morgan bond indices since it would surpass the $500 million eligibility threshold for inclusion, unlike Rwanda’s recent issue.

Aly-Khan Satchu, who heads data vending and financial advisory firm Rich Management, said Kenya could get 0.5 percentage point lower yield than Rwanda. This would effectively bring the cost of the money for Kenya to about 6.4 per cent, exploiting the country’s low reliance on donors and higher credit rating of ‘BB’ than Rwanda’s ‘B’.

“I certainly expect a Kenya eurobond to trade through the Rwanda level. Rwanda were careful to keep a scarcity value around their bond by not upsizing the issue, but given our stronger credit and our minimal dependence on budgetary support I imagine we will trade 50 basis points through Rwanda,” said Mr Satchu.

Alexander Muiruri, a bond trader at African Alliance Investment Bank, predicted a 6.5 per cent yield.

“I think we can get as low as 6.5 per cent as yield for the eurobond, slightly lower than Rwanda,” said Mr Muiruri.

That would also bring the yield lower than that of the syndicated loan issued early last year and set to be fully repaid by mid next year. The commercial loan was priced at about seven per cent inclusive of fees and commissions.

For eligibility as a bench mark issue, which is important for liquidity in the market, Mr Satchu said it was important for the bond to meet the $500 million threshold.

Mr Satchu said the government could even raise $2 billion if market conditions — high liquidity and low interest rates — continue.

“In fact, if market conditions persist, the Kenya government might have the opportunity to sell as much as $2 billion. In the event, the Kenya government upsizes beyond a $1 billion, they will have to price in a concession [compensation for underwriting the issue],” said Mr Satchu.

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