Kenya’s new Sh234 bi*lion Eurobond divides opinion

Opinion is divided over Kenya’s issuance of the Eurobond 2024, timed amidst the anticipated US Federal Bank (Fed) rate cut and a promising government infrastructure bond. National Treasury is in the market seeking to leverage the international bond market to secure funds for the repurchase of its 10-year Eurobond valued at $2 billion (Sh321 billion).

Cabinet Secretary Njuguna Ndung’u announced the successful issuance of a new $1.5 billion (Sh234 billion) Eurobond to buy back the inaugural one due on June 24. The bond, which has a yield of 10.375 per cent, will be repaid in three equal installments in 2029, 2030, and 2031. The bond’s issue price is 97.270 per cent and it is expected to have an average lifespan of six years.

“Kenya received strong demand with a high quality order book exceeding $6 billion (Sh936 billion), allowing for tighter pricing and an increased issuance compared to initial guidance,” Ndugu said in a statement.

The return to international bond market is expected to alleviate the mounting pressure on domestic debt interest rates, assuage investor concerns, and consequently reinforce investor confidence in Kenya’s commitment and ability to repay its maturing debt in June.

However, the decision has sparked debate among analysts, who reckon issuing a sovereign bond when markets reopen and interest rates are expected to drop may not be ideal, citing potential higher borrowing costs, market oversaturation, negative investor perception, and missed opportunities for better financing in the future.

Mohamed Wehliye, a Kenyan financial expert and senior advisor at the Saudi Arabia Central Bank (SAMA) known for his outspoken views on economic matters also argue that the over 10 per cent interest rate on the bond indicates a premature issuance and a sense of desperation that may not accurately represent Kenya’s economic status.

“Anything-double digit is a bad signal and shouldn’t be allowed. Fed will cut, IFBs will do well, and domestic markets have re-opened. What is the desperation? Why send a signal that you are desperate when you are not? Transaction advisors should refund us if this goes through” Wehliye said in a post on his twitter handle.

“I can’t get over the fact that we are paying over 10 per cent arguably at a time when there is light at the end of the tunnel- domestic markets have reopened and rates are likely coming down in Q3 2024 plus 2024 bond looks fully funded. Why the rash? Ivorian and Benin excitement?” Wehliye posed. He was of the view that it might have been more advantageous to wait due to the expected financial conditions.

“We did a bond that we shouldn’t have done now. We expect to have more $$ inflows than outflows (including repayment of 24) between now and June and interest rates are coming down. So, what was the hurry? And why go to the market for such a big amount before IFB instead of after?” he questioned.

Commenting on the bond and debt siutaion, Chairman of the Presidential Council of Economic Advisors David Ndii said 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,” he added.

In early February, Central Bank of Kenya launched a Sh70 billion infrastructure bond set to mature in eight and a half years. It is designed to finance infrastructure projects for the fiscal year 2023/2024.

Kenya now holds three bonds with a cumulative value of $3.5 billion (approximately Sh5.5 trillion). The interest payments for these bonds are estimated to be around $450 million (Sh70.2 billion) due twice annually in February and August.

This has further raised Wehliye’s eyebrows, who was concerned that the large, simultaneous payments could strain the Kenya’s coffers, especially if there are insufficient funds or revenue streams to cover these obligations, potentially impacting the country’s financial stability and creditworthiness.