11 March 2018

Kenya: Eurobond Prospectus Lays Bare Kenya's Precarious Debt Position

Photo: Daily Nation
The Nairobi Securities Exchange (file photo).

Kenya could spend more than 80 per cent -- $1.6 billion -- of the proceeds of its $2 billion Eurobond issued three weeks ago to retire syndicated loans contracted in the past two years.

This puts the country in a vicious cycle of rolling over external debt by using new loans to retire maturing ones.

According to the prospectus used to secure the latest sovereign loan, Kenya told investors that the agreements on two syndicated loans taken out in 2015 and 2017 had clauses that allowed the lenders to call in their money early should Nairobi issue a bond on the international market.

According to the prospectus, Kenya on October 28, 2015 and March 9, 2017, took out two syndicated loans of $750 million and $1 billion respectively, from a consortium of lenders comprising Citibank, Standard Bank of South Africa and Standard Chartered Bank.

The loans have stated maturities of April 27, 2018 and April 18, 2019 respectively were meant to finance the development budget.

As of February 2, 2018, when the prospectus was drafted, Kenya's outstanding debt for the 2015 syndicated loan was $646 million and $1 billion for the 2017 facility.

Under the terms of the 2015 facility, the outstanding amount was to be redeemed at the earliest date of a bond issue by Kenya, or at the maturity date.

The 2017 syndicated loan has a similar redemption feature, but the lenders have the discretion to waive this prepayment demand following an issue of a new bond by Kenya.

"Kenya expects certain lenders to exercise this feature and that they may not require, or may only require part repayment of the 2017 syndicated loan facility," the National Treasury said in the document.

"Accordingly, Kenya expects that part of the proceeds of the Notes (Eurobond) will be applied to repay all amounts outstanding under the 2015 loan facility and that part of the proceeds may be applied to repay a portion of the amount outstanding under the 2017 syndicated loans and manage the maturity profile of the government's debt."

The disclosure that the Eurobond II funds will be used to pay the 2015 loan, however, raises questions on what the government intends to do with the proceeds of another facility taken out in 2017 to refinance this very debt.

In November last year, Kenya picked up a $750 million syndicated loan from Eastern and Southern Africa Trade and Development Bank (TDB) to pay one of the 2015 syndicated loan arrangers to the tune of $104 million. The TDB loan is an eight-year facility maturing in 2025.

But it came with a high interest rate of 6.7 per cent, above the prevailing six-month London Interbank Offer Rate (Libor). This, compared with the $800 million syndicated loan Kenya picked up in February 2017 that attracted a 5.7 per cent interest above the six month Libor, was way more expensive.

Foreign debt

This trend has been common on the domestic debt market, where the government has been rolling over its Treasury bills, but is now becoming entrenched now in the external debt market, a development that risks putting the country in a vicious debt cycle.

A report on debt submitted to parliament by the Treasury in December 2017 showed that Kenya had borrowed more than $4.2 billion in the first four months of the current financial year through external loans.

Treasury documents showed that a huge chunk of this debt was picked up from external lenders, with only $300 million coming from the domestic market.

The local commercial banks recorded a drop in lending to the government during this period, even though the amounts increased by 40 per cent to $6.8 billion as at September 2017, compared with $4.3 billion over a similar period in 2016.

In June and November 2014, Kenya raised $2.75 billion through its debut Eurobond and tap market sales. The proceeds of the issue were used to repay a $600 million loan incurred in the 2011/12 financial year. There were, however, queries on the expenditure of some of the money.

Now, Kenya is expected to face its steepest debt burden in the coming year, when more than $2.2 billion of both its concessional and non-concessional debts mature. About $1.8 billion of this debt to mature this year.

Data from the recent prospectus shows that the stock of gross domestic debt increased to $42.49 billion for the first quarter of the 2017/18 financial year, from $35.72 million in 2016.

Credit rating

The external public debt stock increased by $4.2 billion, from $17.76 billion in September 2016 to $22.12 million by end of September 2017. Domestic debt also rose to $20.37 million, from $17.95 million.

Kenya has in the past one year seen its floating rate debt (bonds that have a variable coupon including Libor) rise by 16 per cent, from $170.63 million in 2016 to $683.65 million last year, putting into sharp focus the country's appetite for expensive debt. The Treasury said that as at June 30, 2017, 29.3 per cent of the country's external debt was floating-rate.

In October 2017, two credit rating agencies, Moody's and Fitch, said that they expected Kenya's debt to rise to 60 per cent of GDP by mid-2018, heralding higher financing costs for the private sector.

According to Moody's, Kenya's debt burden, which stood at 56.4 per cent of GDP by June 2017, was expected to continue rising due to high budget deficit and interest payments.

"Unless a decisive policy response is introduced, the trajectory in government debt will see debt-to-GDP ratio surpass the 60 per cent mark by June 2018. Due to the erosion in government revenue intake in the past five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated," said Moody's.

Kenya has taken up commercial debt, which has seen its interest payments rise to 19 per cent of its revenues, from 10.7 per cent when President Uhuru Kenyatta came to power in 2013.

In the year to June 2017, the total cumulative debt service payments to external creditors amounted to $896.8 million, comprising $341.4 million (38.1 per cent) as principal and $555.3 million (61.9 per cent) as interest.

"A key area of focus in the rating agency's liquidity analysis is the government's increasingly large roll-over of Treasury bills, which amounted to 9.4 per cent of GDP in June 2017, and the external debt payments to private creditors, including the $750 million Eurobond due in June 2019," Moody's said at the time.

Moody's red flag on the country's high loan repayments, which may force it to source new and expensive debt to ensure it does not default, seems to have come to pass, with the revelation of the use of proceeds to pay maturing debt.

In its economic update in December 2017, the World Bank asked Kenya to institute fiscal consolidation measures to slow down debt accumulation, which has risen from 54 per cent in June 2016 to about 57 per cent.

"The expansionary fiscal stance and underperformance in revenue generation has led to a continued rise in the stock of debt. The overall surge was attributed to increase in both external and domestic debt, as government borrowed to finance the fiscal deficit."

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