17 February 2018

Kenyan Team Meets Investors Over Eurobond

As the Kenyan delegation embarked on a roadshow to market a new Eurobond, some prospective investors are said to be demanding a risk premium, citing the country's political uncertainty. This would see the country pay a much higher rate than it had expected.

The Treasury's top officials are visiting the US this week and London at the end of next week on a roadshow to try and excite investors on the $3 billion sovereign bond.

A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield. A bond's risk premium is a form of compensation for investors who tolerate the extra risk, compared with that of a risk-free one.

The EastAfrican has learnt that in one of the meetings in the US, some of the investors questioned the low premium risk Kenya had attached to the bond, noting that they wanted to push it higher by a minimum of 50 basis points.

"Kenya is trying to avoid paying for a premium on this new issue, but the political developments were a concern for investors, as it affect affect the pricing of this bond. This was expressed to the Treasury officials on the roadshow," a source told The EastAfrican.

National Treasury Cabinet Secretary Henry Rotich and his Principal Secretary Kamau Thugge, who are part of the roadshow, did not respond to The EastAfrican's inquiries on the progress of the roadshow.

Kenya's existing $750 million Eurobond, due in June 2019, is currently trading with a yield of 3.7 per cent while the $2 billion bond maturing in 2024 has a yield of 6.651 per cent, according to data from Reuters.

And global credit rating agency Moody's is warning Kenya against issuing another Eurobond, citing rising public debt and the increasing interest payments on foreign currency-denominated debt.

Last week, the agency downgraded Kenya's credit status to B2 from B1 and assigned a stable outlook concluding the review for downgrade which it started in October 2, 2017.

If this downgrade is taken into consideration, investors will demand a risk premium on loans Kenya acquires from foreign lenders. This implies that the ongoing efforts to secure the second Eurobond could turn out to be an expensive affair.

The agency said that although the additional funding is important for the government to fund its rising expenditure, issuing a Eurobond should not be an option at this point.

Increased vulnerability

"Additional funding would help the government meet its financing needs. However, international issuance would increase the government's vulnerability associated with increased reliance on foreign currency-denominated debt in commercial terms, one of the factors noted in our rationale for the rating downgrade," Moody's told The EastAfrican.

"The fiscal outlook is weakening, with a rise in debt levels and deterioration in debt affordability, which Moody's expects to continue," it added.

But the National Treasury's director general of budget, fiscal and economic affairs Dr Geoffrey Mwau dismissed the downgrade as not based on fundamentals, arguing that the ministry is aware of the market conditions and is flexible about what the investors would offer.

The planned Eurobond is between $1.5 billion and $3 billion. Close to half of the money will be used to pay off maturing debt.

The debts include $750 million being part of the $2.75 billion Eurobond issued in 2014 and a syndicated loan of $750 million secured in October 2015. The loan, which was priced at 5.7 per cent per annum, matured in October 2017 but it was extended by six months to April 2018.

--Additional reporting by Allan Olingo


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