Kenya has cancelled the issuance of a Sh115 billion ($1 billion) Eurobond and will instead borrow from a syndicate of banks after the Treasury received bids priced at 12 percent.
Treasury Cabinet Secretary Ukur Yatani said Eurobonds had become expensive in the wake of Russia’s invasion of Ukraine forcing Kenya to reconsider issuing a bond.
Kenya had picked Citi and JP Morgan as joint book-runners for a dollar-denominated sovereign bond issue this year but stalled after the loans became too pricey.
The country will now return to syndicated loans last done in 2019 by ousted Treasury CS Henry Rotich before the government changed its borrowing policy away from commercial banks to reduce the cost of debt and lengthen maturity to ease the payment burden.
Kenya now joins Nigeria which also cancelled a planned issue of $950 million owing to unfavourable market conditions during the timeframe approved for the fundraising.
“In our funding for this financial year, we factored in borrowing from the international market, the Eurobond. But we realised as a result of challenges in Russia and Ukraine the cost of borrowing has gone really high,” Mr Yatani said.
“Last year we borrowed at six percent, right now it stands over 12 percent and this is no longer feasible. That is why we are still exploring options to look at a number of banks that can advance us the money at a cheaper rate, a figure more or less than a figure of last year, an average of six percent,” he said.
Kenya has been forced to abandon its strategy to change the profile of debt from short expensive commercial loans into longer-dated sovereign bonds.
The country had agreed with the International Monetary Fund (IMF) to stick to concessional finance to reduce debt vulnerabilities that have seen the country turn away from syndicated loans and only focus on multilateral lending and Eurobonds.
Kenya is trying to balance its debt portfolio after a surge of commercial debts became expensive to repay, taking up more than 63 percent of tax revenue.
Treasury CS told Parliament in 2020 that commercial loans will only come in form of Eurobonds to roll over principal payments when the debts mature.
“The National Treasury has no immediate plans to contract syndicated loans with Trade Development Bank or any other bank,” Mr Yatani said.
“Our projections assume that existing Eurobonds will be rolled over at reasonable prices when global capital markets reopen to frontier market issuers,” he said.
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Kenya’s commercial debt is mainly in Eurobonds with an outstanding portfolio of six worth a total of $7.1 billion (Sh829.9 billion), which are traded on the Irish and London stock exchanges.
The Eurobonds have risen sharply in the past few weeks, to trade above 10 percent in the secondary market and are an indication of the pricing the country will get if it goes to the international market.
The rise of the yield — which measures the return an investor gets from buying the fixed income securities — comes as major central banks, including the Federal Reserve of the US, are expected to raise interest rates significantly to dampen inflation.
Investors typically demand higher returns from lending to emerging and frontier countries such as Kenya that are seen as relatively high-risk compared to obligations of the US and European governments. Syndicated loans are provided by a group of lenders to spread the risk of default.
They are easy to get and require fewer disclosures since they are negotiated out of public scrutiny. However, they are usually short-term and expensive.
Analysts say the Treasury can get the loans at a lower rate, but it will either be a short term debt and the rate will vary during the term of the loan which may be expensive in the long run.
The bank loans will be based on the secured overnight rate which is priced off the US Fed rates plus a premium varying over the term of the loan.
The Fed has raised its benchmark rate and is expected to increase the rate in the next couple of meetings which means the syndicated loan pricing will balloon over time.
“The danger happens if the Fed rate goes up three to four times, so even if the initial rate is six it will end up at seven or eight. It will also be a short tenor loan otherwise banks will demand higher premiums,” said Churchill Ogutu - Economist IC Group.
Kenya, under the Jubilee administration, has borrowed nine syndicated loans compared to only one during the tenure of President Mwai Kibaki, reflecting the recent borrowing spree.
These have been borrowed from Standard Bank, StanChart, Citi Bank, Trade Development Bank (former PTA Bank), HSBC, and Qatar National Bank.
Kenya’s borrowing has hit Sh8.4 trillion, which is 70 percent of the GDP from 48.6 percent in 2015. Parliament this week raised the debt ceiling from Sh9 trillion to Sh10 trillion.