Kenya has issued a new $2 billion Eurobond at the London Stock Exchange. The National Treasury announced that the bond was over-subscribed seven times.
As a country, we are clearly stuck on the external debt treadmill. We are firmly under what is now popularly described as ‘Eurobondage’.
This is when as an African country you find yourself in a vicious circle where you are permanently financing debt with debt, perennially negotiating extensions of redemption periods, and constantly dropping in credit ratings.
Nobel laureate Joseph Stiglitz could not have described the Eurobond borrowing craze we are witnessing in Africa more aptly.
He attributed the phenomenon to ‘‘short-sighted financial markets, working with short-sighted governments, laying the ground work for the world’s next debt crisis’’.
Consider the following facts. In 2014, we went to the international debt markets to borrow money through a Eurobond issue.
What was the purpose? We informed international markets that the money we were borrowing was going to be used in repaying a $600 million syndicated loan that we had borrowed in 2012 to fund infrastructure development and provide budget support.
In other words, we were literally borrowing from Peter to pay Paul. We must not forget that the 2014 Eurobond was preceded by an extension of the term of a maturing syndicated loan that was due in May 2014 and which had to be extended to August of that year.
Whichever way you look at it, we were in technical default when we negotiated the extension. Indeed, when a sovereign fails to repay any portion of a maturing debt and resorts to rescheduling tenors or maturities with creditors, that sovereign is technically in default.
But here is how history is repeating itself right now. First, the $2 billion Eurobond we have just issued was -like happened in the 2014 issue - preceded by extending the term of a maturing syndicated loan that was due in October last year, but which was extended by six months to April this year.
Secondly - and just like in 2014, the money we are raising from the $2 billion we have just raised is earmarked for repaying an existing syndicated loan- a $750 million facility that we borrowed in 2016 for the purpose of ‘infrastructure development’ and ‘general budget support’.
It is interesting that even as the National Treasury was in the middle of conducting an investor road show for Kenya’s second Eurobond, Moody’s sovereign ratings downgraded the Kenya issuer- rating.
Moody’s cited several reasons, including weakening fiscal outlook with a rise in debt levels, over reliance on commercial debts and large gross financing needs.
But what fascinates me most is the way the ‘Eurobondage’ game is played.
First, an African country is approached by three or four commercial banks with a proposal to arrange or underwrite a syndicated multi-million dollar loan, typically with a two to three-year tenure.
When the syndicated loan comes due three years later, the African country will have no dollars to repay.
But the stage will have been prepared for the same banks to come to you, offering to take you to international debt markets and support you in issuing a Eurobond so that you can get the money to repay the syndicated loan.
What you will observe is that any time the bonds or syndicated loans are nearing maturity, the country will not just borrow for refinancing of existing debt. They will issue bigger bonds to make it possible for them to collect big enough net proceeds to fund other expenditure.
European banks and fund managers are hopping from one African country to the another, where they collude with corrupt officials to saddle citizens with expensive dollar loans that are, in most cases, used to fund opaque security contracts padded with huge kickbacks and backhanders.
These people act as if they are oblivious to what economists call asset mismatches — the fact that in most cases these loans have to be repaid from local currency tax revenues.
These European banks are merely engaged in a selfish search for fat fees and commissions.
And with hungry Europeans ready for a piece of the action, all Eurobonds issued by African countries are invariably oversubscribed.