Kenya seeks adviser for third sovereign bond

Saturday January 26 2019

Kenya is looking for a financial consultant to advise on the timing, pricing and viability of the third sovereign bond — estimated at $2.5 billion.

The government is seeking the loan to finance its operations and pay off other maturing debt.

With a $750 million Eurobond priced at 5.875 per cent maturing in June this year, the National Treasury is under pressure to meet the government’s external debt obligations and protect the country’s declining credit status, which has already been downgraded by rating agency Moody’s.

It is estimated that during the 2018/2019 fiscal year Kenyan taxpayers will finance close to Ksh100 billion ($1 billion) in interest payments on foreign loans and pay off maturing debt estimated at Ksh380 billion ($3.8 billion).

The country’s total public debt stands at over Ksh5 trillion ($50 billion) which is equivalent to more than half of GDP, raising concerns about its sustainability.

The EastAfrican has learnt that the National Treasury — which has been criticised for its excessive borrowing — is now looking for a transaction adviser to assess market conditions and advise on the viability of the planned issue.


Debt distress rating

However, analysts at Cytonn Investments caution that Kenya’s attempts to go into the international debt market will be hampered by higher premiums on the bond pricing after the International Monetary Fund downgraded the country’s debt distress rating from low to moderate in October 2018 and withdrew its $1.5 billion standby facility for the country.

“The downgrading of Kenya’s debt distress rating from low to moderate by the IMF would mean investors will expect higher yields on any new debt issued,” Cytonn said in its market report dated January 20.

In February 2018, Kenya issued its second $2 billion sovereign bond to pay off its maturing debt and fund its development plans. 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.

By December 2018, the yields on the 10-year bond had risen by 1.9 percentage points to 8.9 per cent from seven per cent on the issue date, while the yields on the 30-year bond had increased by 1.7 percentage points to 9.7 per cent from eight per cent during the same period.

Kenya’s first Eurobond of $2 billion was issued in June 2014, followed by $750 million in tap sales in December the same year. The $750 million and $2 billion Eurobonds mature in 2019 and 2024 respectively.

In sub-Saharan Africa, Eurobond yields have also been on an upward trend partly due to the rise of interest rates in the US and a stronger dollar.

Africa has increased its uptake of foreign debt, largely to finance heavy infrastructure projects, budget deficits, and maturing debt obligations.

Last year, sub-Saharan Africa (excluding South Africa) raised $13.7 billion through Eurobond issues. It is argued that African sovereign debt offers the highest yields to global investors, averaging a dollar-bond yield of six per cent, which is higher compared with the emerging market average of 5.5 per cent, North America’s 4.5 per cent and the Asia Pacific’s four per cent.

The yields on the new issues rose in 2018, mainly due to trade tensions between the US and China, dampening investor sentiment in emerging markets.