Economy

Terms of Kenya’s Sh108bn fresh Eurobond revealed

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Public Debt Management Office director-general Haron Sirima. FILE PHOTO | NMG

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Summary

  • The Treasury said that the offer was oversubscribed more than four times, attracting bids worth Sh582.7 billion ($5.4 billion).
  • Experts say that the country’s risk profile has been lowered by the backing of the IMF and the World Bank, which have agreed programmes in excess of $4 billion in the past one year.
  • Kenya’s commercial debt is mainly in Eurobonds and syndicated loans which accounted for about 26 percent of external public debt at the end of 2020.

Kenya has raised Sh108 billion ($1 billion) in a Eurobond issuance, at an interest rate of 6.3 percent for the 12-year bond that is the fourth sovereign debt to be floated by the country since 2014.

The Treasury said that the offer was oversubscribed more than four times, attracting bids worth Sh582.7 billion ($5.4 billion).

The country had been shopping for investors for the bond since Tuesday in a virtual roadshow, and said on Thursday evening that it hit its target of Sh108 billion in less than a week for the loan whose principal will be paid back in two tranches to ease repayment pressure down the road.

The public debt management office has been working to reduce borrowing rates and lengthen or stagger repayment periods to ease pressure on the country’s cash flow.

“We went to the market seeking to raise $1 billion and stuck to the discipline of our target amount despite the oversubscription and competitive pricing,” said Dr Haron Sirima, the director general of the Public Debt Management Office.

“Going forward we are optimistic that Kenya will successfully execute liability management operations in the next fiscal year in line with the debt strategy of lowering cost and minimising risks in the public debt portfolio.”

Amortising the bond— meaning that principal is paid down in instalments rather than in one bullet payment at maturity— will ease the rolling over of the bond when it becomes due.

This will help the country to avoid the headache of looking for a huge amount of dollars at one go to pay back the lenders, like will be the case in June 2024 when the $2 billion, 10-year tranche first Eurobond issued in June 2014 falls due.

“Final maturity (is on) 23 June 2034. Principal repayment is in two equal instalments on 23 June 2033 and 2034,” said the Treasury in roadshow documents seen earlier by Business Daily.

Experts say that the country’s risk profile has been lowered by the backing of the IMF and the World Bank, which have agreed programmes in excess of $4 billion in the past one year.

This has reassured investors that that the country is unlikely to face balance of payment problems, at least in the short term when the Covid-19 problems have hit economies hard.

This meant that investors in the new Eurobond were unlikely to demand a bigger premium in interest when lending to the country, hence the government’s success at securing a lower interest rate that it had been able to in the most recent Eurobonds taken in May 2019 and February 2018.

The 2019 bond raised $2.1 billion, which was in two tranches of $900 million priced at seven percent for a seven-year paper and eight percent for a 12-year, $1.2 billion tranche.

The one issued in February 2018 raised $2 billion in two equal tranches of $1 billion, paying 7.25 percent for the 10-year paper and 8.25 percent for the 30-year option.

Kenya’s commercial debt is mainly in Eurobonds and syndicated loans which accounted for about 26 percent of external public debt at the end of 2020.

Eurobonds account for 70 percent of Kenya’s commercial debt ($6.1 billion), while syndicated loans represent 27 percent (about $2.5 billion).

The borrowing has pushed total Kenyan debt to Sh7.4 trillion, which is equivalent to 69 percent of the GDP from 48.6 percent in 2015, raising questions about its sustainability.

The Treasury says it now prefers Eurobonds to syndicated loans that are arranged by a group of private banks that charge higher rates over shorter durations.

The surge of commercial debts piled since 2013 has, however, become expensive to sustain with repayments and interest taking up more than 65 percent of tax revenue in the next financial year.

The country has, therefore, gone back into the embrace of the Bretton Woods lenders after a prolonged period of avoiding these concessional loans which come with a raft of conditionalities tied to economic reforms.

This move has been informed by a desire to reduce the overall cost of external debt, given that these IMF and World Bank loans are much cheaper compared to commercial loans, come with a grace period and are repayable over a longer duration.

A debt review by the IMF shows that Kenya’s loans from multilateral lenders increased from $10.2 billion in 2019 to $13.7 billion in 2020.

In 2013 only seven percent of external debt was commercial, while 27 percent was from bilateral lenders and 64 percent from multilateral sources.