Kenya pays dearly to avoid Sh316bn Eurobond default

Kenya is set to pay dearly to avert a default of the $2 billion Eurobond maturing in June after it settled on a higher rate on its return to the global debt market to finance an early buyback. The East African nation has offered investors 9.75 percent on its new seven-year $1.5 billion Eurobond, which is more expensive than what Benin and Côte d'Ivoire got in their bonds issued in the past three weeks.

The proceeds of Kenya’s new Eurobond are meant to buy back a portion of the 2014 $2 billion issue for which it has been paying investors a coupon of 6.875 percent.

The higher rate on the new bond will see the country incur annual interest of $146.25 million (Sh23.2 billion), payable in two equal instalments every six months from August this year. This is higher than the $137.5 million (Sh21.82 billion) the government has been paying annually for the 2014 bond.

To attract investors, the government also offered a discount which saw those who bid save Sh2.73 for every Sh100 invested.

The higher cost is despite the fact that the new bond is smaller than the 2014 issuance by $500 million —an amount which if also refinanced at the 2024 bond’s rate would incur an interest charge of $48.75 million (Sh7.7 billion).

The Treasury says Kenya received strong demand, with a high-quality order book exceeding $6 billion (Sh948 billion), allowing for tighter pricing and an increased issuance compared to the initial guidance.

The State is expected to take up $1.5 billion that will be redeemed in three equal instalments of $500 million on February 16 of 2029, 2030 and 2031.

“The combined transactions are a crucial part of the government’s strategy to smooth the maturity profile of the 2024 Eurobonds and proactively manage debt liabilities,” Treasury Cabinet Secretary Njuguna Ndungú said.

Analysts see the rate premium that the country has paid in comparison to its previous Eurobonds, and also other issuances by Benin and Côte d'Ivoire in the past three weeks, as a reflection of the government’s tough external debt situation, where its principal repayments for the current fiscal year stand at Sh633 billion.

This means that Kenya had to offer a premium in order to guarantee interest in its new bond.

The timing of the issuance has also been a factor, coming well before the expected rate cuts by the US Federal Reserve that are expected to transmit into lower borrowing costs for issuers in smaller markets like Kenya.

“The government is in tune with market demands because it has given a premium in line with associated risks and market trends. The risk associated with issuing a bond just before a coming maturity is not the same as one without a maturity in sight, such as the case of Benin,” said Wesley Manambo, an analyst at Standard Investment Bank (SIB).

“The Treasury would have, however, likely got a better rate if it issued the bond closer to June, which is when we are likely to see the Fed cutting its rate. If they were to do this in June though, their default risk rating would be higher because of trying to raise a paper just before another matures.”

Kenya issued the bond to fund the buyback that the government hopes will reassure investors of its ability to refinance its maturing obligations. The buyback tender, which was opened on February 7, closes on Wednesday.

The refinancing deal also reflects prevailing market conditions in which African issuers have faced elevated rate demands from international lenders over the past two years, largely due to a strong dollar and higher US rates, which have made assets in smaller markets less attractive.

Conditions have, however, softened enough to allow for a return to the market, which has now accepted single-digit rates from three countries.

Côte d'Ivoire’s issuance on January 24, the first by an African country in two years, saw it raise $2.6 billion (from bids worth $8 billion) through two bonds with tenors of eight and 13 years at rates of 7.88 percent and 8.5 percent.

Benin’s debut 14-year dollar bond, which was sold last week, raised $750 million out of bids worth $5 billion, at a coupon of 8.375 percent.

The lower pricing of these bonds in comparison to Kenya’s was influenced by the different credit ratings of the respective countries, according to the chairman of the Presidential Council of Economic Advisors David Ndii.

“Markets tell the truth. The pricing is consistent with our credit rating. It was not going to change because the policy risks are structural. When you get a weak grade in an exam you don’t whine, you work on doing better,” said Dr Ndii in a post on X (formerly Twitter).

Kenya’s rating by agencies Fitch and S&P is currently at B, with a negative outlook. This is lower than Benin’s rating of B+ with a positive outlook, and Côte d'Ivoire’s BB- with a stable outlook.

Kenya's B rating indicates that the country has the capacity to service its debt but can slide into default due to adverse business, financial or economic conditions.

The current rollover is also not the first time that Kenya has paid back a Eurobond using proceeds of a higher-priced follow-up sale.

In May 2019, the Treasury issued a $2.1 billion Eurobond in two tranches of seven years ($900 million) and 12 years ($1.2 billion) at interest rates of 7.0 percent and 8.0 percent respectively.

Part of these proceeds was used to refinance a maturing $750 million, five-year Eurobond that was issued in June 2014 (maturity: June 2019), which carried a coupon of 5.875 percent.