Eurobond debacle makes borrowing difficult for Kenya

Saturday December 12 2015

Treasury secretary Henry Rotich (centre) with PS Kamau Thugge and Controller of Budget Agnes Odhiambo. PHOTO | EVANS HABIL

Treasury secretary Henry Rotich (centre) with PS Kamau Thugge and Controller of Budget Agnes Odhiambo. PHOTO | EVANS HABIL 

By ALLAN OLINGO, The EastAfrican

Kenya will find it more difficult to borrow new money from the international commercial market after a controversy surrounding the use of $2.75 billion raised through a sovereign bond last year rattled investors, sending yields up.

Borrowing in the international market is usually cheaper and is preferred to domestic borrowing because it allows local banks to give advances to the private sector to spur growth.

The increase in yields means taxpayers would pay more in interest for any money the government seeks to raise through selling debt to global investors.

Companies wishing to borrow internationally for expansion would also be forced to pay higher interest rates because their terms are priced off that of the sovereign bond.

“The Eurobond will push up the premium on yield (returns) on Kenyan corporate dollar issues (both short and long) and make it difficult for African governments to raise money cheaply through external borrowing,” said Alexander Muiruri, a fixed sales analyst with Kestrel Capital East Africa.

According to Bloomberg Markets, the return on the country’s $2 billion bond, due in June 2024, climbed 124 basis points in the past month, to 9.23 per cent, before recouping to 9.13 per cent on Thursday.


Investors also sold off the Kenya bond more aggressively with 4.9 per cent of the value changing hands, the worst of the 61 emerging markets that the financial data vendor tracks.

At its issuance in June 2014, the yield on Kenya’s 10-year security stood at 6.75 per cent, but has risen nearly 300 basis points to the current 9.13. That of the five-year bond was at 5.875 per cent, and has since risen to around 8.3 per cent at the Irish Stock Exchange where it is listed.

In contrast, the five-year bond was Friday selling at  93.229, giving a return of about 8.430 per cent, a far cry from a 12-month high price of 103.865 as at the end of April this year. The 10-year bond is selling at 86.761, a return of about 9.15 per cent against a high of 106.386 on April 29, 2015.

Analysts said the reasons for the Eurobond prices falling (thus yield rising) is the speculated US interest rate hikes, and the slowdown in Chinese growth and its impact on Africa in general. Because of this, emerging markets like Brazil and South Africa have been suffering; sucking in frontier markets like Kenya.


The winners are new liquid African frontier funds looking for exposure to dollar denominated sovereign African debt. The losers include initial investors who’ve booked revaluation losses, African governments and African dollar corporate debt issuers.

Already, Kenya’s National Treasury has indicated that it will be paying $89.9 million in interest repayments at the end of this month, out of the $849.2 million due at the end of the year, and a further $8.5 million due at the end of January 2016. As at July, the debut international Eurobond cost Kenya $164 million in interest payments.

In October, Kenyan opposition leader Raila Odinga alleged that $1.4 billion of the the money the Eurobond raised in 2014 was misappropriated.

The Treasury has however insisted that the sovereign bond and the tap sales were used to fund part of the development budget, adding that only three transactions were carried out on each of the offshore accounts used for transacting the Eurobond money. These included repayment of the syndicated loan, expenses relating to the issuance of the sovereign bond and the tap sales, and the transfer of the balance to the Consolidated Fund.

“All the proceeds of the sovereign bond issued in June 2014, and the tap sales issued in December 2014, were fully accounted for. From the $2.5 billion, $5.3 million was spent in paying back a syndicated loan with the rest absorbed in the budget to finance projects,” Treasury Principal Secretary Kamau Thugge said.

Analysts say that best practice for handling international bond proceeds allows for short terms bonds to be held locally (country of issue) for speedy utilisation. For long term projects, it is preferable to hold the proceeds in foreign accounts of the central bank, then introduce it into the market later and benefit from the currency gains.

Kevin Tuitoek, a macro-economic analyst at Genghis Capital, said pressures arising from the Eurobond questions had raised some uncertainty in international markets, contributing to the increase in yields.

“This uncertainty among bond investors has seen the government scale back on a second Eurobond issue, and also on some international debt obligations,” Mr Tuitoek said.

International investors could also be wary as Kenya was recently downgraded to a negative rating by international agency Fitch.

Kenya’s Bond Market Association chairman John Mwaniki said other investment instruments, like the upcoming $300 million infrastructure bond, could also explain the rise in yields.

“We are looking at savvy investors who understand the market. They clearly know the truth in the Eurobond fiasco. What they look at are the returns, and they could be offloading their investment from the Eurobond and investing it in these attractive infrastructure bonds like the one just concluded,” Mr Mwaniki said.

At the start of December, the Central Bank of Kenya issued a nine-year infrastructure bond worth $300 million, to fund energy, water and road projects. The bond, which was to be free from income tax, was priced at 11 per cent.


In 2014, several African economies floated Eurobonds. Yields on Zambia’s Eurobonds hit record highs; the first Eurobond, which was to mature in 2024, rose by 2.94 per cent to 11.94 per cent. Another bond, set to mature in 2027, has risen by 0.76 per cent.

The yields on Ghana’s $1 billion Eurobond, due in August 2023, climbed 38 basis points to 10.6 per cent, while the rates on Nigeria’s $500 million of debt, due in July 2023. went up 92.20 basis points to 8.83 per cent.

“One of the key things that has hampered the performance of these international bonds, especially in emerging markets, is the currency volatility that has hit sub-Saharan economies,” Mr Tuitoek said.

Alexander Muiruri, head of fixed income at Kestrel Capital, said, “Emerging markets have also faced a number of significant foreign portfolio outflows over the past month, mostly because of the anticipated US Fed hike as most investors now want to associate themselves with US class assets.”

Mr Tuitoek said bond investors are reducing their exposure in emerging market assets, which have returned low yields in the past month.

Bond notes for some emerging markets have faced their second worst season since 2008. Last month, Gaston Gelos, the chief of the global financial stability analysis division at the IMF, said that despite weaker balance sheets, emerging markets have managed to issue bonds at lower yields and longer maturities.

“These developments make emerging market economies more vulnerable to a rise in interest rates, dollar appreciation, and an increase in global risk aversion,” he said.