Treasury delay in Eurobond issue to hurt companies

Kenyan companies will pay the price for delays by the government in issuing a sovereign bond that is expected to be the new benchmark for lending rates.

The Treasury has confirmed that it would pay more for the bond targeting up to $2 billion (Sh170 billion) after the US government cut down on its bond buying programme known as tapering in jargon.

The tapering has increased the cost of raising money on the international market with Treasury Secretary Henry Rotich saying that investors will be paid more for the 10-year sovereign bond.

“The recent tapering of quantitative easing in the US suggests that Kenya’s sovereign bond may be priced between 7.625 per cent per annum and 8.125 per cent per annum,” Mr Rotich states in the Medium Term Debt Strategy (MTDS) 2014.

The government plans to use part of the proceeds to pay a $600 million syndicated loan and plug a Sh330 billion deficit. The MTDS guides the government on the best approach to raise money from the domestic and international markets.

READ: Treasury plans negotiations to delay payment of syndicated loan

The Treasury’s estimates make the sovereign bond to be issued by April more expensive than similar ones done before the US stopped recalling its debt at the beginning of the year.

Rwanda’s 10-year $400 million (Sh35.5 billion) sovereign bond issued in April last year was priced at 6.875 per cent and was oversubscribed by eight times.

Metropol executive director James Murigu said that the delay had resulted in Kenya missing out on the window for lower rates. However, he added, a better rate can still be achieved depending on the appetite for the bond.

“If the demand is big enough then the transaction advisers can negotiate better rates,” Mr Murigu told the Business Daily.

Rating agency Fitch said recently that the delay would make the debt more costly for taxpayers, with a domino effect on Kenyan firms seeking commercial debt at the financial capitals.

READ: Eurobond offer still on course, says Treasury

“Typically the sovereign bond provides the benchmark and the banks tend to follow, then the other entities,” said Fitch head of Middle East and Africa sovereigns Richard Fox at a conference call on Kenya held earlier in the month.

KenGen plans to borrow up to Sh420 billion over the next six years and an international bond is one of the capital raising options it is considering.

Kenya Power had planned to issue a Eurobond but dropped the plans after getting better loans from international lenders.

Equity Bank sought a credit rating in late 2012 which was seen as a precursor to issuing a bond either locally or internationally.

The listed firms would have to rely on borrowing from the more expensive domestic market in the absence of government issuing the sovereign bond.

The sovereign bond was initially planned for 2009 but was shelved due to the global financial crisis. It was rescheduled to last year before being pushed to the end of the first quarter of this year.

The Treasury has appointed lead transaction advisers JP Morgan Chase and Arnold & Porter LLP as lead counsel for the Eurobond sale.