The Treasury plans to repay syndicated loans worth $880 million (Sh113.9 billion) using the leftover cash from last month’s $1.5 billion (Sh194.05 billion) Eurobond buyback.
Treasury Cabinet Secretary John Mbadi said that the priority is refinancing the syndicated loans that are falling due in September and October in order to get their expensive interest rates off the government’s books.
He disclosed that Kenya has a total outstanding stock of Sh324 billion worth of syndicated loans, out of which Sh123.2 billion ($952 million) is due to be repaid in September and October. These loans carry interest rates of between 12 and 13 percent.
“We are going to retire around $880 million out of the $952 million syndicated loans due in September and October. If you are retiring loans of seven percent and 12-13 percent with a loan of 9.75 percent, then you are debt neutral,” he said in an interview with a local TV station.
Syndicated loans are commercial credit facilities provided to the government by one or a group of lenders, usually on short-term tenors and at higher interest rates compared to multilateral and bilateral loans, and Eurobonds.
They are usually quicker to disburse and easier to negotiate for the government since they deal with selected lenders and are negotiated outside of public scrutiny. This type of loan is commonly tapped when a project requires too large a loan for a single lender or when a project needs a specialised lender with expertise in a specific asset class.
Last month, Kenya floated a new $1.5 billion (Sh194.05 billion) Eurobond whose proceeds were to be channelled towards buying back a $900 million (Sh116.43billion) one, but investors agreed to sell back only 64.4 percent, which translated to $579.6 million (Sh75.1 billion).
This left the country with a larger-than-expected balance of Sh119.1 billion from the new Eurobond compared to the planned Sh77.5 billion after the buyback. The amount is held at the CBK reserves and the Treasury says it will be used to settle syndicated loans within the month.
Because of the large balance from the Eurobond transaction, Mr Mbadi has now raised the size of the syndicated loans to be refinanced using the cash, saying that it will ease the pain of repaying the 2027 Eurobond with a more expensive new issuance.
“We, therefore, went for the more expensive syndicated loans (to repay with the Eurobond balance) to neutralise the effect of repaying a cheaper loan with an expensive one,” he said.
Kenya’s liability management plan has seen it perform buybacks of both external and domestic debt falling due in the short-term using proceeds of new loans of a longer tenor, effectively reducing the refinancing risk on the country’s public debt.
The loans due to be repaid in September include two facilities of $200 million (Sh25.9 billion) and €75 million (Sh10.5 billion) owed to the Trade and Development Bank (TDB), which is the biggest syndicated loan lender to Kenya.
Another $646 million (Sh83.59 billion) falls due in October, Mr Mbadi said, with the loans carrying interest rates of between 12 and 13 percent.
Regional and global lenders that have issued such loans to Kenya in the past include Standard Bank of South Africa, Citi Bank, Standard Chartered Bank, Afreximbank, Hong Kong and Shanghai Banking Corporation (HSBC), and Qatar National Bank (QNB).
The excess Eurobond buyback cash lifted the official foreign reserves held at the CBK past an all-time high of $10 billion (Sh1.29 trillion).
The current official reserves now reflect 5.1 months of import cover, exceeding the CBK and the East African Community (EAC) statutory requirements of maintaining at least four and 4.5 months respectively.
Foreign exchange reserves are held at the CBK as national assets and are used as a safety net to ensure the availability of foreign exchange to meet Kenya’s external obligations, including paying for imports and external debt service.
The CBK reserves have previously come under pressure, particularly in 2023, as the apex bank was forced to sell dollars from the cover to maintain exchange rate volatility.
Reversal of exchange rate pressures starting in early 2024 has, however, allowed the CBK to rebuild the buffer by tapping increased inflows from foreigners buying into government domestic debt, rebounding exports, and growing diaspora remittances.
The reserves are also used to intervene when deemed necessary to smooth ‘erratic’ movements of the exchange rates and the CBK external payments.
