After 17 years, the timing is finally on Kenya's side as the government readies its first Eurobond sale, betting the nation's growth prospects and resurgent demand for emerging-market debt will keep borrowing costs contained.
Investors may demand a yield of about 7 percent to buy the securities, less than the 7.48 percent yield on similarly rated Zambian bonds, according to Raza Agha at VTB Capital Plc in London. Aly-Khan Satchu at Rich Management Ltd. in Nairobi sees a range between 7.5 percent and 8 percent, depending on whether Kenya sells $2 billion or $1.5 billion.
"We are still living through another six to nine months of an environment which is very, very beneficial for issuers given the high demand for emerging markets," Yerlan Syzdykov, who helps oversee the equivalent of about $5.4 billion as head of emerging markets bond and high yield at Pioneer Investments, said in an interview in London yesterday. "A lot of countries, especially in sub-Saharan Africa, will use this as an opportunity to tap the market."
East Africa's largest economic growth will probably accelerate to 6.3 percent this year, from 5.6 percent in 2013, driven partly by tea and cut flower exports, according to International Monetary Fund estimates. African dollar debt returned 8.3 percent this year, with the average yield dropping to a one-year low of 5.06 percent last week, JPMorgan Chase & Co. indexes show. Gains have been fueled by speculation central banks in Europe and the U.S. will keep monetary policy accommodative.
Kenya first considered selling Eurobonds in 1997, and would be following a record year for Africa in 2013. That included a first-time offering by Rwanda, and sales by Nigeria and Ghana.
Zambia, which shares Kenya's B1 rating at Moody's Investors Service, sold $1 billion of Eurobonds priced to yield 8.6 percent in April. The rate was 7.51 percent yesterday, up from a record low of 7.35 percent two days earlier.
"Kenya is a stronger credit, so it should price inside Zambia," Agha, VTB Capital's chief economist for the Middle East and Africa, said yesterday. "I expect there to be good demand for the issue."
Barclays Plc, JPMorgan, Standard Bank Group Ltd. and QNB Capital were picked to organize investor meetings in the U.S. and Europe from today until June 15, a person familiar with the deal said yesterday. A benchmark dollar bond may follow, according to the person, who asked not to be identified because they're not authorized to comment.
The shilling gained for a fourth day, the longest rally since Feb. 20, advancing 0.1 percent to 87.35 per dollar at 9:55 a.m. in Nairobi. The yield on Kenya's 10-year local-currency debt was little changed at 12.2 percent, within six basis points of the record high reached last month following twin explosions on May 16 that killed at least 12 people in the capital. The country revived its bond offering plans after settling two court-awarded payments.
"The security situation doesn't really make much of impact" because the government has a good track record of repaying its debts, said Alexander Muiruri, a fixed-income analyst at Nairobi-based Kestrel Capital (East Africa) Ltd. Investors will probably require a yield of 8 percent or 8.1 percent based on the rate Zambia paid, Muiruri said.
"In terms of the global-investor base you can raise money at any time," Muiruri said by phone yesterday. "There will be a good subscription, it is just a matter of what cost needs to be paid."