Kenya Pipeline Company (KPC) Ltd is considering issuing a US dollar-denominated corporate bond to refinance part of the $350 million syndicated loan it secured from a consortium of banks two weeks ago.

“We would consider issuing a bond depending on market conditions; but we would certainly explore it,” KPC chairman John Ngumi, told The EastAfrican.

Mr Ngumi, who was a member of the transaction advisory team for the syndicated loan by virtue of his position as Standard Bank’s head of investment banking in East Africa, said the bond market is more suitable once the construction of the pipeline is completed. Standard Bank owns CfC Stanbic bank, which handled the transaction.

“During the construction, it makes better sense to borrow from banks where there is flexibility to match drawdown to the project construction timetable than to go to the bond market, which typically requires one drawdown,” said Mr Ngumi. “This is an unsuitable structure since one would be paying interest on money one is not using immediately.”

A syndicated loan is money lent to a borrower by a group of banks that agree to spread out the risk of default.

If successful, the state-owned corporation will be the first Kenyan company to tap into the international debt market after the government issued its debut $2 billion sovereign bond that was oversubscribed four times last year.

The bond helped to benchmark Kenya’s credit status and to facilitate access to international capital markets by corporate entities.

KPC secured the $350 million syndicated loan a fortnight ago from a group of local and international banks namely Co-operative Bank of Kenya, CfC Stanbic, Citibank NA, Commercial Bank of Africa, Standard Chartered Bank and Rand Merchant Bank (a division of FirstRand Bank Ltd).

The loan will be used to fund 72 per cent of the $484 million pipeline project involving the replacement of the company’s 450 kilometre line 1 multi-product fuel pipeline from Mombasa to Nairobi. The balance of 28 per cent ($135 million) will be financed using the company’s internal resources.

“KPC revenue is US dollar-denominated or US dollar-linked, so there is no currency exposure for the company. Under these circumstances it makes absolute sense to borrow in US dollars,” said Mr Ngumi.

Habil Olaka, chief executive, Kenya Bankers Association said KPC was effectively managing its forex risk by taking dollar-denominated loans since the bulk of its receivables are dollar-denominated.

In 2011, KPC negotiated with local banks for a loan of Ksh8.2 billion ($79.09 million) to finance the rehabilitation and enhancement of the Nairobi-Eldoret petroleum products pipeline (line 4).

Kenya’s total pipeline infrastructure spans some 900km, from Mombasa to Nairobi, extending to the west of the country to Eldoret and Kisumu.

READ: New $57m KPC pipeline to ease fuel supply in western Kenya

The US dollar-denominated loan symbolised the emergence of Kenyan banks, particularly Co-operative Bank and Commercial bank of Africa, in forex denominated large-scale infrastructure financing.

The 10-year loan attracts interest at the rate of 5.38 per cent above the London InterBank Offered Rates (Libor) — the benchmark rate, the world’s leading banks charge each other for short-term loans.

The Mombasa-Nairobi pipeline has been in operation for more than 35 years and therefore, requires frequent rehabilitation to maintain its efficiency and economic viability for the next 29 years.

Replacing the pipeline would ensure the sustained, reliable and efficient transportation of petroleum products in the region. It is expected to meet demand for petroleum products until the year 2044. The new 20-inch pipeline is being built by Lebanon-based construction and engineering firm Zakhem International SA.

KPC, which is 100 per cent owned by the Kenyan government, supplies petroleum products in Kenya and to the neighbouring countries of Uganda, Rwanda, Burundi, Democratic Republic of Congo, South Sudan and Tanzania.

Kenya’s national demand for petroleum products stands at about 4.4 billion litres up rom 3.4 billion in 2010. The combined demand of its neighbours is about 2.8 billion litres, up from 2.4 billion in 2010.

Kenya is grappling with an estimated infrastructure funding gap of about $2.1 billion. The country requires a sustained spending of $4 billion annually in 10 years to bridge it.