How Kenya averted risk of debt default during the year
A maturing $2 billion Eurobond that Kenya had contracted in June 2014 raised fears of a possible sovereign default, which would have had devastating consequences for the economy.
In October 2023, international commercial lenders made it clear that they would only lend to the Kenya government, if it was prepared to pay between 13 and 19 percent in interest on dollar loans.
At the heart of these steep rate demands was a concern that the government would struggle to repay a maturing $2 billion Eurobond, that it had contracted in June 2014. This bond was Kenya’s debut issuance of its kind, and was attracting annual interest of 6.785 percent, a bargain at prevailing rates.
This was despite the government repeated assurances to investors that it would refinance the maturing debt, ruling out the possibility of a sovereign default which would have had devastating consequences for the economy.
Eurobonds are retired through a single bullet payment at maturity, unlike other external loans from bilateral and multilateral lenders, whose principal is paid down progressively along with interest throughout the life of the facility.
The default fears persisted into 2024, after the government failed to make an earlier advertised $300 million partial buyback of the bond by the end of December 2023, citing advice from transaction advisors that such a move would have been seen as a default under the terms of the Eurobond.
The buyback was to be financed through a syndicated loan from the Eastern and Southern African Trade and Development Bank (TDB).
These investor jitters filtered through to the local economy, where the shilling weakened to a historic low of Sh161.35 to the dollar in January, in turn raising the local currency value of Kenya’s external debt while also inflating the cost of servicing the debt.
Lenders to the government on the domestic market also expressed their unease with the government’s tight fiscal position by raising their rate demands on local bonds and Treasury bills.
An 8.5-year infrastructure bond issued in February paid interest of 18.46 percent —tax free— making it the most lucrative such paper ever floated by the government. Other bonds were paying between 16 and 18 percent, depending on duration.
Treasury bill rates also rose in the period to highs last seen in November 2015, underlining the high risk premium investors were placing on government debt.
To get out of the debt hole and calm the markets, the National Treasury revived the buyback in early February, while also announcing a parallel issuance of a new Eurobond whose proceeds would be used to pay those opting to be bought out of the older issuance.
Due to elevated interest rates, Kenya had stayed out of the Eurobond market for nearly three years since it issued a $1 billion, 12-year paper in June 2021, at an interest rate of 6.3 percent.
The announcement of the new bond and the buyback had an immediate impact on the risk rating assigned to the country by investors however, with yields on the 2014 bond at the Irish Stock Exchange –where it was listed—falling to 8.5 percent from 13.6 percent within an hour of the buyback disclosure on February 7.
Kenya was also encouraged to move fast to tap the commercial bond market after Cote d’Ivoire and Benin accessed the market at sub-10 percent rates in the preceding three weeks.
Cote d’Ivoire’s issuance on January 24, the first by an African country in two years, saw it raise $2.6 billion (from bids worth $8 billion) through two bonds with tenors of eight and 13 years at rates of 7.88 percent and 8.5 percent.
Benin’s debut 14-year dollar bond, which was sold on February 7, raised $750 million out of bids worth $5 billion, at a coupon of 8.375 percent.
Eventually, Kenya’s new bond sale raised a gross amount of $1.5 billion for the government, at a rate of 9.75 percent. Out of this amount, $1.44 billion was used to make the partial buyback of the 2014 bond, with the balance covering transaction fees.
Following the buyback, the shilling gained rapidly versus the dollar, to settle at Sh128.50 by June, and has traded within a tight range of this level in the second half of the year.
The remaining $560 million on the 2014 bond was repaid as scheduled at the end of June, using part of the proceeds of a $1.2 billion loan from the World Bank, which had been approved at the end of May.
Following the February Eurobond, Kenya has not tapped into external commercial debt again, instead opting to lean on concessional long term funding from the World Bank and the International Monetary Fund (IMF).
The World Bank loaned Kenya $1.2 billion in May under its fiscal sustainability and resilient growth Development Policy Operation (DPO), while the IMF approved a disbursement of Sh78.4 billion ($606.1 million) to Kenya in October, following the conclusion of the seventh and eighth reviews of the ongoing extended credit facility and extended fund facility (ECF/EFF) programme.
