Kenya has canceled the issuance of a 115 billion shillings ($1 billion) Eurobond and will instead borrow from a syndicate of banks after the Treasury received offers at a price of 12%.
Treasury Cabinet Secretary Ukur Yatani said Eurobonds had become expensive following Russia’s invasion of Ukraine, forcing Kenya to reconsider issuing a bond.
Kenya had chosen Citi and JP Morgan as joint bookrunners for a dollar-denominated sovereign bond issue this year, but stalled after loans became too expensive.
The country will now revert to syndicated loans last made in 2019 by ousted treasurer Henry Rotich before the government changed its borrowing policy from commercial banks to reduce the cost of debt and lengthen the maturity to ease the payment burden.
Kenya now joins Nigeria which also canceled a planned $950m issue due to unfavorable market conditions during the approved fundraising period.
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“In our financing for this financial year, we have included a loan on the international market, the Eurobond. But we realized that following challenges in Russia and Ukraine, the cost of borrowing had become very high,” Mr. Yatani said.
“Last year we borrowed at 6%, right now it’s over 12% and that’s not feasible anymore. That’s why we’re still exploring options to look at a number of banks that can advance us l money at a cheaper rate, a figure more or less than last year, an average of 6%,” he said.
Kenya was forced to abandon its strategy of changing the debt profile from short and expensive commercial loans to longer-term sovereign bonds.
The country had agreed with the International Monetary Fund (IMF) to stick to concessional financing to reduce debt vulnerabilities that have seen the country shift away from syndicated loans and focus solely on multilateral loans and Eurobonds .
Kenya is trying to balance its debt portfolio after an increase in commercial debts that have become costly to repay, absorbing more than 63% of tax revenues.
CS Treasury told Parliament in 2020 that commercial loans would only take the form of Eurobonds to defer principal payments when debts come due.
“The National Treasury has no immediate plans to enter into syndicated loans with the Trade Development Bank or any other bank,” Yatani said.
“Our projections assume that existing Eurobonds will be rolled over at reasonable prices when global capital markets reopen to frontier market issuers,” he said.
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Kenya’s commercial debt consists mainly of Eurobonds with an outstanding portfolio of six bonds worth a total of $7.1 billion (829.9 billion shillings), which are traded on Irish stock exchanges and Londoner.
Eurobonds have risen sharply in recent weeks, to trade more than 10% higher in the secondary market and are an indication of the price the country will get if it moves to the international market.
The yield hike – which measures the return an investor gets from buying fixed-income securities – comes as major central banks, including the U.S. Federal Reserve, are expected to raise interest rates dramatically to curb inflation.
Investors generally demand higher yields from loans to emerging and frontier countries such as Kenya, which are considered relatively high risk compared to US and European government bonds. Syndicated loans are provided by a group of lenders to spread the risk of default.
They are easy to obtain and require fewer disclosures because they are traded away from public scrutiny. However, they are usually short-lived and expensive.
Analysts say Treasury can get the loans at a lower rate, but it will either be short-term debt and the rate will fluctuate over the life of the loan, which can be costly in the long run.
Bank loans will be based on the guaranteed overnight rate which is calculated on US Fed rates plus a premium varying over the term of the loan.
The Fed has raised its benchmark rate and is expected to raise the rate at the next two meetings, which means the price of syndicated loans will rise over time.
“The danger occurs if the Fed rate increases three to four times, so even if the initial rate is six, it will end up at seven or eight. It will also be a short-term loan, otherwise the banks will demand higher premiums,” said Churchill Ogutu – Economist IC Group.
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Kenya under the Jubilee administration borrowed nine syndicated loans compared to just one under President Mwai Kibaki, reflecting the recent surge in borrowing.
These were borrowed from Standard Bank, StanChart, Citi Bank, Trade Development Bank (formerly PTA Bank), HSBC and Qatar National Bank.
Kenya’s borrowing reached 8.4 trillion shillings, or 70% of GDP from 48.6% in 2015. Parliament this week raised the debt ceiling from 9 trillion shillings to 10 trillion shillings.