Kenya quietly selling third Eurobond in Europe and the US to finance budget, repay lenders

Saturday May 11 2019

President Uhuru Kenyatta (left) with Deputy President William Ruto and National Treasury Cabinet Secretary Henry Rotich in 2014 announcing the success of Eurobond 1. PHOTO | EVANS HABIL | NMG


Kenyan treasury officials quietly flew out to Europe and the United States to drum up support for a new $2.5 billion Eurobond—the country’s third in five years.

Nairobi’s quest to take up a new Eurobond comes despite rising concern over the sustainability of the country’s public debt in the wake of a slowdown in revenue growth.

The EastAfrican has learnt that the Treasury officials were due to start meeting investors on Thursday May 9 to market the bond which is being sold in two tranches of 12 and 31 years.

Reuters news agency reported that JP Morgan and Standard Chartered bank have been appointed lead arrangers and that the Eurobond that will be listed on both the Irish and London stock exchanges.

Kenya is in dire need of cash to finance its budget and pay off maturing loans, including a $750 million Eurobond priced at 5.875 per cent that is due for payment this June.

Analysts have however argued that Kenya’s attempts to tap into the international debt market without the International Monetary Fund’s $1.5 billion standby facility—it was withdrawn last year—could dampen investor confidence and push premiums on the bond higher.


Kenya has also suffered a credit rating dent after the IMF downgraded its debt distress rating from low to moderate last October.

Higher interest rates

Economists reckon African countries seeking to tap into the international debt market through the issuance of Eurobonds this year will have to bear with higher interest rates even as the extent of economic reforms constitute a critical requirement for risk assessment.

“We expect global financial conditions to tighten causing investors to price risks differently. Investors have started demanding higher premiums and the borrowing countries’ reforms will be key to credit assessment,” Razia Khan, the Standard Chartered Bank’s chief economist in charge of Africa and the Middle East, said earlier this year.

“Most sub-Saharan countries are now seeking IMF programmes to boost investor confidence and their credibility,” she added.

Ms Khan reckons Kenya’s external debt ratios have continued to receive more scrutiny partly because external debt service is expected to rise to 26.2 per cent of exports in 2019.

Analysts at the global rating agency Moody’s said Kenya’s Eurobond will attract higher refinancing costs.

“A successful issuance would support Kenyan government’s foreign exchange liquidity. However, in time its increased reliance on external commercial debt would come at the expense of higher exchange-rate risks and interest payments for the government, aggravating an already large and persistent fiscal deficit,” said Moody’s.

Tough year

Last year, African Eurobonds suffered in a tough market characterised by a stronger dollar, the Federal Reserve raising US rates, trade tensions and concerns over global growth and that of China, according to the global investment bank Renaissance Capital.

Confidence was eroded further as investors lost money in Argentina and Turkey.

“These factors led to investors pulling money out of emerging and frontier market bond funds that invest in African Eurobonds,” said Gregory Smith, a director-in-charge of fixed income strategies and emerging markets, at Renaissance Capital.

Then the Federal Reserve in March this year all but ruled out any further interest rate increases in 2019 in a surprising monetary policy meeting.

The result is that throughout the first quarter (January-March) of this year, money has flowed into bond funds investing in African Eurobonds.

Concerns over the worsening US-China trade relations however remain, posing a risk to sovereign bond issuers.

Mr Smith reckons that African countries with good economic reform programmes such as lowering fiscal deficit, adequate forex reserves and sound debt management practices coupled with running IMF programmes would do better at winning investor confidence in their Eurobond issues.

“The reforming African economies will fare best when markets are tough,” he said. Ten of the African eurobond issuers, including Angola, Morocco, Ghana, Egypt, and Senegal have IMF programmes while Zambia is still negotiating one.

Last year, Kenya raised $2 billion in a new sovereign bond issues that closed in February.

The bond was issued in two equal tranches of 10 years at a coupon of 7.25 per cent and 30 years at a coupon of 8.25 per cent.