On February 7, the Kenyan government made an offer to partially repurchase its existing Eurobond, which is maturing on June 24, 2024, at par, including payment of accrued interest. Additionally, the government announced its intention to issue a new bond in the market. 

The issuance altered earlier expectations that the National Treasury would finance the planned buyback using the state’s forex reserves or proceeds from loans from multilateral lenders. 

The country is borrowing USD1.5 billion (Ksh234 billion) by selling a type of debt (Eurobond) to investors. This loan must be paid back by the year 2031. The price of the bond is set at 97.270 percent of its face value. This implies that, for every USD100 worth of bonds, they are being sold for about USD97.27. The interest rate (yield) that Kenya will pay the investors is 9.75 percent annually on the bond’s face value. 

The government initially started with an 11 percent yield but managed to lower it to 10.375 percent. This adjustment was made possible due to high demand from investors, with orders surpassing USD6 billion. The initial expectation was to set the bond’s yield at around 11 percent, indicating the cost at which Kenya would borrow. However, strong demand allowed Kenya to offer the bond at a lower yield, making it slightly cheaper for the country to borrow the money.

The government’s proactive approach to managing its liabilities has been well-received by investors, who appreciate the country’s efforts to manage its upcoming debt maturities by issuing a new bond and thus preserving its foreign currency reserves. The preservation of forex reserves has been a key motivator in issuing the new bond. 

The proceeds will be used partially to retire the USD2 billion (Ksh321 billion) Eurobond maturing in June 2024, which has a 6.875 percent coupon, further strengthening the country’s financial position. It is expected that what will remain after the buyback will be paid for using other sources of money, including funds from the Kenyan government, loans and grants from other countries (bilateral), international organisations (multilateral), and banks.

The bond is amortised in three equal instalments. This means that, instead of paying back the entire loan in 2031, Kenya will pay it back in three equal parts in the years 2029, 2030, and 2031. On average, the money borrowed through this bond will be outstanding for about six years. 

Initial offer

This initial offer by Kenya faced very high borrowing costs, at 11 percent, which was the highest by an African issuer this year. For instance, Benin sold a 14-year bond at 8.375 percent, while Ivory Coast sold its bond at 8.5 percent. 

Bloomberg had reported that the new bond offer was also expected to lengthen the average maturity of the country’s outstanding debt. The government found itself in a cash crunch of USD 5.2 billion of foreign debt in principal and interest payments, which are due this financial year, and another USD 2.7 billion due in the next financial year.

Kenya also needed market access to avoid drawing down USD 7.1 billion of foreign exchange reserves to meet its refinancing needs. Any withdrawal from reserves to pay the June 2024 maturity would have weakened the economy’s credit metrics.

Good tidings

Research and analysis conducted by the Diamond Trust Bank (DTB) indicate that the current year, 2024, is expected to bring good tidings for businesses and investors, despite starting sluggishly.

DTB’s Head of Research and Analysis, Faith Atiti, stated on February 14 that with the issuance of the USD 1.5 billion Eurobond, the markets have started to stabilise. “We are seeing some stability in the exchange rate. Those buying dollars from the market are getting a lot more favourable rates. These are initial signals that sentiments are turning,” she said.

Ms Atiti added that: “As the exchange rate stabilises, we expect inflation to equally come down, especially since about 40 percent of it was linked to forex pass-through. That will give CBK headroom to begin reducing interest rates. We do expect that at least mid-year, we should begin to see interest rates coming down.” 

The CEO of the Institute of Economic Affairs,  Kwame Owino, noted that the first reaction from people who held bonds from Kenya, as well as Kenyan citizens, is one of relief. It is now clear that the question of the repayment that is due in June has been resolved.

“The possibility of a default has been kicked into the future. There’s more confidence now, and you could see it in the fact that the interest rates came down,” he said. 

Pricing

National Treasury Cabinet Secretary Njuguna Ndung’u announced the successful issuance of the new Eurobond. “Kenya received strong demand with a high-quality order book exceeding USD 6 billion, allowing for tighter pricing and an increased issuance compared to initial guidance,” Prof Ndung’u said. 

A Kenyan financial expert and senior advisor at the Saudi Arabia Central Bank (SAMA), Mohamed Wehliye, argued that the over 10 percent interest rate on the bond indicates a premature issuance and a sense of desperation that may not accurately represent Kenya’s economic status.

“We did a bond that we shouldn’t have done now. We expect to have more dollar inflows than outflows (including repayment on the 24th) 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 posted on X.

He added, “I can’t get over the fact that we are paying over 10% 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 rush? Ivorian and Benin excitement?”

Chairman of the Presidential Council of Economic Advisors David Ndii said the 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 said. 

President William Ruto, on February 14, said the government will face debt issues head-on and will not default.