Kenya returns to global market for another Eurobond

Kenya will on Monday tap the international bond market for the first time since 2021 to raise cash to finance a buyback of the 10-year $2 billion (Sh321 billion) Eurobond, a move that has calmed investor jitters over whether the country would afford to repay the debt when it matures in June.

The surprise issuance marks a departure from earlier expectations that the National Treasury would finance the planned buyback using the country’s forex reserves or proceeds from loans from multilateral lenders.

The Treasury on Wednesday opened the tender offer for bondholders wishing to participate in the buyback, which has been priced at the bond’s par or face value. It further said the buyback would be financed by the proceeds of the new Eurobond offer whose amount was not specified.

Sellers will also be paid accrued interest on their bonds, whose most recent interest payment was in January. Investors had a positive reaction to the announcement of the buyback and new bond sale, with secondary market yields on the 2024 bond that trades on the Irish Stock Market falling from 13.6 percent to 8.5 percent within an hour of the buyback disclosure on Wednesday afternoon. It traded at 9.6 percent by 4pm on Thursday.

Read: Why Kenya is considering a Eurobond buyback

The secondary market movement of yield and price is an indicator of the risk assigned to an issuer by investors—where falling yields and rising prices signal waning risk aversion, and the opposite shows rising risk concerns.

The price per $100 on the Kenya bond rose to $99 on Thursday, up from $97.50 before the buyback announcement.

“The main concern for investors has been whether Kenya would afford to afford the outsized obligation of $2 billion towards retiring the maturing bond. The positive reaction to the buyback and new bond in terms of the yield movement therefore shows a level of comfort,” said Churchill Ogutu, an economist at IC Group (Mauritius).

“The expectation that Kenya will regain international market access based on the buyback and the new bond, sentiment is set to improve on the forex market due to the potential increased flows coming in over and above the loans from multilateral lenders.”

Kenya has kept out of the Eurobond market since it floated a $1 billion (Sh160 billion), 12-year paper in June 2021, on which it pays an interest rate of 6.3 percent.

Difficult market conditions in the intervening period, where yields or interest rate demands rose to as high as 22 percent, have meant that the country (and other African sovereigns) have been unable to tap commercial debt, instead relying on concessional financing from the International Monetary Fund (IMF) and the World Bank.

However, a successful issuance of a dual-tranche $2.6 billion (Sh417 billion) Eurobond by Cote d’Ivoire at the end of January at single-digit interest rates of 7.88 percent and 8.5 percent has encouraged Kenya to move fast to take advantage of the potentially friendlier rates in the external bond market.

The maturing Eurobond, coupled with the previous inability to access sizable external commercial debt has sat heavily on the Treasury’s fiscal operations and the shilling over the past year.

The State had earlier indicated that it would lean on new dollar inflows from IMF and World Bank loans, and the country’s forex reserves to repay the maturing Eurobond.

Financing a buyback or the June maturity from the country’s forex reserves has been seen as a negative for the shilling, whose stability is underpinned by the ability of the Central Bank of Kenya to iron out volatility using these reserves, which stood at $7.13 billion (Sh1.14 trillion) at the end of last week.

The new buyback plan has, therefore, handed the government a way out of the difficult situation, while the new bond issuance also opens an avenue to raise external financing towards its budget deficit for the current fiscal year.

“If the principal amount of the Notes exceeds the aggregate amount of 2024 Notes tendered in the Tender Offer, the Issuer intends to utilise the balance for general budgetary expenditures,” said the Treasury in a prospectus for the new Eurobond.

Read: Volatility hits Kenya’s $2bn Eurobond close to maturity

In the current year, the government expects to raise Sh363 billion in net foreign financing, and Sh451.7 billion from domestic sources, to fill its budget deficit of Sh814.8 billion.

The Treasury has not placed a cap on the value of the Eurobond it will buy back in the present transaction, meaning that in case of a high subscription on the new bond, it will have a free hand in determining the allocation split between the buyback and budget financing.

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