Kenya Power should reduce its dollar loansWednesday March 22 2023
Kenya Power’s decision to renegotiate the terms of a part of its US dollar loans will help alleviate its cash flow pressure in the short term.
The company should, however, treat this as the first step to reducing its foreign currency borrowings in general.
This is particularly urgent in the current context where the Kenyan shilling is losing ground against major world currencies, inflating debt service costs for companies with foreign debt.
In the case of Kenya Power, higher finance costs hurt the company as well as consumers of electricity whose bills are adjusted to take into account the effect of the negative currency movements.
Forex costs are currently the largest components in electricity bills among the variable charges paid by customers ahead of inflation adjustment. The utility says it is close to completing the renegotiation of the terms of Sh6 billion worth of two dollar-denominated loans.
Kenya Power did not specify the lenders it has approached to modify the loans but it has three major creditors that provided it with dollar-denominated facilities.
The company’s biggest dollar-denominated loan is a Sh23.01 billion facility owed to Standard Chartered Bank, whose maturity date is June 2026. It has an interest rate based on the Libor plus a 4.15 percent margin.
Kenya Power is in a capital-intensive business and will continue using debt. Most of the foreign currency loans were sourced when the shilling was fairly stable and hence did not pose a major debt service risk.
It is now time to significantly raise the component of shilling loans.