How Eurobond owners forced Kenya from G20 debt relief

A restrictive clause in the Eurobond terms stopped Kenya from seeking a suspension of debt payments under a G20 initiative aimed at helping poor countries weather the Covid-19 disease pandemic.

Eurobond terms indicate that non-payment of Kenya’s external debt, including seeking moratoriums, would be considered as defaulting, which could trigger a demand for the country to pay the entire Eurobonds worth $6.1 billion (Sh652.7 billion).

This means that the Treasury could be forced to pay eight times the Sh72 billion relief it would have received for a freeze on bilateral loans repayments.

The Group of 20 major economies had in April agreed to suspend payment obligations on bilateral debt owed by their less developed counterparts through the end of the year.

The goal was to free up more than $20 billion (Sh2 trillion) that poor or struggling governments could use to buttress their health services.

Treasury Secretary Ukur Yatani told the Business Daily in an interview that Kenya had opted against seeking the debt suspension due to a number of reasons, including the Eurobond terms, fears that the relief could hurt the country’s credit rating.

“The conditions were very restrictive. They say you should not borrow commercially yet we are already holders of commercial paper like Eurobonds and the clause in that Eurobond says if you do not pay debt on any bilateral or any other matter it is deemed that you have defaulted,” Mr Yatani said.

Clause 10 of the Eurobond prospectus states that holders of 25 percent of the notes can trigger a recall of the entire loans and interest in the event of a default.

Some of the actions that the Eurobond terms consider as default include failure to pay principal for 15 days or interest for 30 days and failure to comply with terms in the contracts for 45 days.

Eurobond holders can list Kenya as a defaulter if the country fails to pay any external debt or a guarantee worth more than $25 million (Sh2.6 billion) or gets a moratorium on the foreign loans.

Kenya will also be deemed to have defaulted if it ceases to be a member of the International Monetary Fund or if it is not eligible to use resources of the Bretton Woods institution. The country may also be labelled a defaulter if it refuses to pay the Eurobond, sues in court or changes the law relating to it.

In the event of a default, Kenya can only be saved by 50 percent of the investors agreeing not to call up the debt immediately.

“A declaration of acceleration may be rescinded in certain circumstances by the resolution in writing of the holders of at least 50 percent,” says the Eurobond prospectus.

Kenya has five Eurobond notes whose tenures range from seven to 30 years with the repayment for the last one set for 2048.

Mr Yatani argued that Kenya can only be part of the G20 initiative if private lenders like the Eurobond type are part of the debt relief efforts.

“So if we rush and say we do not pay, even if we do not default on theirs (Eurobond) the fact that we are not paying on bilateral debt it is deemed that we have already defaulted,” he said.

“It is a conversation we are engaging to bring also these commercial entities on board to make sure they agree on a moratorium. Until that is agreed we do not want to rush into it.”

The G20 initiative only covers official bilateral debt, though it calls for the voluntary participation of private lenders on comparable terms.

A third of Kenya’s Sh3.2 trillion external debt is owed to private creditors including holders of the country’s Eurobonds.

The Covid-19 pandemic has caused the government’s budget deficit to swell to 8.2 percent of GDP in the financial year to the end of June, from an initial forecast of under seven percent, mainly due to reduced tax collection and foregone revenue in the form of VAT and income tax cuts.

But the deficit is projected to narrow to 7.3 percent - equivalent to Sh823.2 billion - in the 2020/21 fiscal year and to 4.2 percent of GDP by 2023/24, Treasury data indicates.

Moody’s downgraded Kenya’s outlook to negative from stable on May 7, citing the shock caused by the Covid-19 pandemic to its tourism industry and farm exports.

Last month, the IMF raised the country’s risk of debt distress to high from moderate.

The Treasury was also concerned that terms of the debt relief limiting countries’ access to international capital markets during the standstill could hinder Kenya’s ability to finance its deficit later in the year.

Relatively wealthy Angola has asked for G20 debt relief. The country relies heavily on oil revenues and is saddled with debts that exceed its economic output.

It is struggling from the economic fallout of the coronavirus disease pandemic and an oil price shock that saw crude prices plunge below $20 per barrel in April.