Eurobond: Rotich delays Kenya’s debt problem

Kenya’s debt pile increased sharply with Thursday’s issue of a Sh210 billion Eurobond, as the Treasury raced to raise funds for the repayment of yet another international bond floated five years ago.

Treasury Cabinet Secretary Henry Rotich, in a now familiar strategy of kicking the debt can down the road, announced that part of the new debt will be used to retire the Sh75 billion debut Eurobond floated in 2014.

The Treasury has in recent years been rolling over foreign debt accumulated under the Jubilee administration by refinancing maturing loans using longer-dated loans that ease the short-term risk of default and prevent a hard hit on the country’s dollar reserves.

In addition to repaying the Sh75 billion debt, which is due in a month’s time, the government has left the door open to settling other maturing loans using proceeds of the 2019 Eurobond, as per a statement released Thursday by Mr Rotich.

Single instalment

There has been rising concern over the ability of Kenya to settle maturing foreign debts, especially the syndicated loans and Eurobonds whose principal amount is paid in a single instalment on maturity.

The Treasury’s limited success in trimming the national budget has also left it no choice but to borrow a higher amount each year to repay maturing loans.

Kenya’s total public debt is now well over Sh5 trillion, having outpaced the rate at which the taxman has been raising revenue for its repayment and financing of the national budget.

“The government keeps missing revenue targets, then we have the question of repaying existing debt and financing expenditure that is going up all the time,” said Deepak Dave, a risk management expert at Riverside Capital.

“Eurobonds risk becoming the foreign currency equivalent of the endless Treasury bills that were being issued in the late 1980s and 1990s at high interest rates just to keep things going.”

In turning to longer maturity loans to refinance current debt, there is also the risk of higher interest charges since investors’ yield demands go up in tandem with the repayment period of a loan.

“Some of the demand for the Eurobond is likely to be passively invested money, where they say that so long as the yield is high enough as per the credit rating given to the country they will continue to buy,” said Mr Dave.

Oversubscription

Investors oversubscribed the latest Eurobond by 4.5 times, offering $4 billion (Sh400 billion) in the seven-year and $5.5 billion (Sh550 billion) in the 12-year tranches respectively against the combined target of $2.1 billion.

Treasury Principal Secretary Kamau Thugge told the Business Daily Thursday that they took up $900 million (Sh90 billion) for the seven-year tranche and $1.2 billion (Sh120 billion) for the 12-year one.

Investors in the seven-year tranche will earn seven per cent interest annually while the 12-year option is paying eight per cent.

The Treasury earlier this year also took up Sh125 billion ($125 billion) in new syndicated loans to refinance maturing debt of the same nature, although the rates were not disclosed.

The Treasury’s budget summary for the 2019/20 fiscal year, tabled in Parliament last month, put the total amount of external debt maturities for the current fiscal year at Sh259.4 billion, and interest payments at Sh103.7 billion.

Budget deficit

These payment obligations are on top of new external borrowing, set at Sh321 billion, which is meant to partly fill a budget deficit of Sh635 billion.

The maturities are largely the 2014 Eurobond and two syndicated loans from global lender Citi and regional lender Trade and Development Bank (formerly PTA) at Sh135 billion.

“All maturing syndicated loans for this financial year have been restructured to provide for longer tenors of between seven and 10 years,” Dr Thugge told the Business Daily Thursday, indicating that the funds borrowed earlier this year had gone towards the Citi and TDB loans.

In a departure from the previous two Eurobond sales, the Treasury has also introduced amortisation to the latest issue, looking to avoid having to make one huge payment at maturity of the loans in 2026 and 2031.

The government will pay back $300 million (Sh30 billion) and $400 million (Sh40 billion) respectively to investors of the seven- and 12-year tenors in each of the last three years to maturity in order to avoid the huge lump sum at the end of the loans period.

This effectively means that by the last date of payment, pending maturities of the seven-year paper will be $300 million, and $400 million for the 12-year paper.

Third Eurobond

The Eurobond, which is being listed on the Irish Stock Exchange, was arranged by global lenders JP Morgan and Standard Chartered.

It is Kenya’s third Eurobond issue, following the debut $2.75 billion (Sh275 billion) sale in June 2014 that was made in two tranches of five years (Sh75 billion) and 10 years (Sh200 billion).

In February last year the country floated its second bond, raising $2 billion (Sh200 billion).