Yields on Kenya’s Eurobonds fell by up to 0.6 percentage points following the upgrade of its credit rating by global agency S&P last Friday, indicating improved investor sentiment towards the country ahead of planned external debt refinancing next month.
Kenya’s seven outstanding Eurobond tranches worth a cumulative $7.41 billion (Sh958 billion) are listed on the London and Irish stock exchanges, with their secondary market yields serving as a barometer of the risk rating of Kenya’s debt by international lenders.
S&P revised Kenya’s long-term sovereign credit rating to 'B' from 'B-', with a stable outlook, while the short-term sovereign credit rating was affirmed at 'B'. The ratings are one of the factors considered by investors when they price sovereign debt.
The agency attributed the change in rating to the Kenya’s reduced external liquidity risks due to stronger inflows from exports and diaspora remittances, and manageable debt service charges over the next two years. It also said that the lower domestic interest rates should ease the government’s cost of funding its budget deficit.
Analysts have, however, warned that for the yields on external debt to remain lower for longer, the government ought to improve its fiscal discipline to avoid renewed borrowing pressure that will force rates upwards.
“Any material upside to Kenya’s outlook could stem from a solid demonstration of the sovereign’s commitment to sustainable public finance and fiscal discipline. Moreover, Kenya’s ability to attract concessional external financing would be a critical piece,” said analysts at NCBA in a fixed income note.
Following the S&P review, the $1 billion (Sh129.23 billion), 10-year Eurobond issued in 2018 recorded the biggest yield decline among the outstanding papers, trading at 6.86 percent on Tuesday compared to 7.42 percent last Friday. The bond is now trading at a yield that's lower than its coupon of 7.25 percent.
The 12-year, $1.2 billion (Sh155 billion) paper issued in 2019 saw its yield fall from 9.05 percent to 8.61 percent, while the yield on the 13-year, $1 billion bond issued in 2021 fell from 9.55 percent to 9.13 percent.
The 30-year, $1 billion bond sold in 2018 meanwhile saw its yield retreat to 9.9 percent from 10.11 percent, while the yield on the seven-year, $1.5 billion (Sh194 billion) paper floated last year declined to 8.63 percent from 8.75 percent on August 21.
In the secondary bonds market, yields show the rate at which an investor would be willing to lend to the issuer at a particular point in time. Falling yields therefore indicate that investors have lowered the risk perception on the issuer of the paper.
The lower yields thus signal that Kenya would pay lower interest if it were to return to the market today for new debt, a factor that should help the Treasury when it refinances external debt next month.
On Monday, National Treasury Cabinet Secretary John Mbadi said that the government is planning to refinance a $400 million (Sh51.7 billion) loan owed to the Trade and Development Bank (TDB) next month, either through a new facility from the same lender or through other sources of debt.
The CS added that the Treasury is also mulling further Eurobond buybacks to address maturities in 2028 and 2031, similar to the 2024 and 2025 buybacks that refinanced a cumulative $2.08 billion (Sh269 billion) worth of sovereign bonds.
