Kenya Eurobonds rally on Moody’s rating upgrade

Moody’s upgraded Kenya’s long-term foreign currency sovereign credit rating from “Caa1” to “B3” noting that the country’s near-term risk of default had fallen.

The “Caa1” rating implies that Kenya’s debt was judged to be of poor standing and subject to very high credit risk with the “B3” rating signifying an improved standing, but obligations are still viewed as speculative and subject to high credit risk.

The agency also noted that Kenya’s external liquidity position had improved, supported by higher foreign-exchange reserves, a narrower current account deficit and a more stable shilling.

Moody’s rating action coincides with wider gains for sovereign debt instruments from emerging and frontier economies as the US loses part of its haven appeal.

“The catalysts for yields moving lower this week are the Moody’s rating action especially given that the ratings agency is deemed to have the most bearish view or credit risk. This upgrade addresses improving country specific risks,” said IC Economist Churchill Ogutu.

The Sh154.8 billion ($1.2 billion) Eurobond maturing in 2032 gained the most by 0.133 percentage points to 7.099 percent while the shorter dated Sh27.5 billion ($213.4 million) Eurobond maturing in May next year moved higher slightly by 0.064 percentage points to 5.747 percent during the week.

Falling yields on Kenyan Eurobonds imply the instruments are viewed as more attractive to investors in the secondary market.

Eurobond yields have an inverse relationship to prices where prices increase as interest rates/yields fall.

Kenyan Eurobonds had already been rallying since last year with traded yields falling as the haven appeal of the US began to fade with the dollar sliding.

This has improved investor sentiments on assets deemed to be riskier including sovereign bonds from emerging and frontier economies.
Traded Eurobond yields now sit well below the instrument coupons, an indication that Kenya would likely achieve lower interest rates if they returned to market to issue new sovereign bonds at this time.

The Sh193.5 billion ($1.5 billion) Eurobond maturing in 2036 which was issued last year with a 9.5 percent coupon had a traded yield of 8.45 percent at the end of Thursday last week.

“The relatively lower yield today than when Kenya tapped the market early last year shows that credit spreads have really tightened, making a new issuance more appealing,” added Mr Ogutu.

The National Treasury has set its sights on only issuing new Eurobonds to refinance more expensive sovereign instruments as part of liability management operations.

The Treasury is for instance mulling to refinance some its Sh1.1 trillion ($8.78 billion) worth of outstanding Eurobonds via a debt-for-food security swap after receiving a Sh129 billion ($1 billion) guarantee from the United States International Development Finance Corporation (US-DFC).

The swap is expected to bring significant relief as the Eurobonds are expected to cost taxpayers Sh84.73 billion in interest payments for the year ending June from Sh73.89 billion previously.

“We are getting a guarantee from the US-DFC which will enable us to issue an instrument in the financial market at a fairly good rate, and then we can use that to take out either a Eurobond or some other expensive commercial borrowing,” said Raphael Owino, the director-general of the Public Debt Management Office

“We may target a range of instruments rather than focusing on one, depending on what is happening in the market at a particular time, which should give us an indication of the specific instrument to go for.”

In 2025, the National Treasury undertook early repayments on Sh116.1 billion ($900 million) and Sh129 billion ($1 billion) Eurobonds maturing in 2027 and 2028, bring down the balances to Sh27.5 billion ($213.4 million) and Sh47.9 billion ($371.56 million), respectively.

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