Kenya seeks to spend another 130.7 billion shillings ($1 billion) this year to repay its multi-billion-shilling Eurobond due in 2027, as incoming payments slow as part of efforts to mitigate currency and default risks.
The country unveiled a buyback plan to the World Bank, but did not reveal whether it would use taxes or tap new loans to repay Eurobonds due the next tranche of 117.6 billion shillings ($900 million) in 2027.
Kenya has been on the radar of global investors due to growing concerns that it may fail to repay its first Eurobond due this month in the wake of tense public finances.
But in February, the country sold $1.5 billion (Sh196 billion) of new eurobonds, which came at a hefty cost, to finance the buyback of a large portion of the $2 billion (Sh261.4 billion) bonds.
The second buyback is expected to ease Kenya's debt burden while alleviating a repeat of last year's concerns over its ability to repay the debt looming, given rising public loan repayments.
“To this end, the Government of Kenya is considering buying back another European bond in 2024, bringing the total buyback for 2024 to about Sh326.7 billion ($2.5 billion), smoothing the consumption profile as happened for the last issuance which was facilitated over three years. The World Bank said in a report accompanying its 156.8 billion shillings ($1.2 billion) loan to Kenya last week.
“In addition, the government is considering managing liabilities by leveraging sustainability instruments such as debt swaps and sustainability-linked bonds (SLBs).”
Confidence following the repayment of the first Eurobond in February has pushed the value of the Kenyan shilling against the dollar to the current Sh130.50 from a peak of Sh160.75 on January 29.
By undertaking the repo, the government was able to overcome investor fears that some expected Kenya to default in a situation that led to a sharp deterioration in the exchange rate in the run-up to the February action.
“The government addressed the immediate liquidity crisis by buying back $1.5 billion of Eurobonds maturing in June 2024 by issuing new Eurobonds on February 12, 2024, calming markets; yields on Eurobonds maturing fell and the exchange rate rose again,” the World Bank added. Other.
Kenya's stock of outstanding Eurobonds is estimated at 927.9 billion shillings ($7.1 billion), including the latest issue, with maturities expected between June this year and February 2048.
The total outstanding Eurobonds amount to nearly 10 percent of Kenya's public debt stock which stood at Sh10.3 trillion as of end-March.
Eurobonds attract higher interest costs unlike loans from bilateral and multilateral partners such as the World Bank due to their commercial nature.
The savings from the buybacks will therefore be crucial for the government, which spent an estimated one-third of its normal revenue in the year to June 2023 on interest costs, or Sh33 for every Sh100 in taxes collected.
The pressure on the government's finances has forced it to extract every shilling it can from taxpayers, angering voters who chose this administration on the promise of lowering the cost of living.
But it benefits from international support, including from the International Monetary Fund and the World Bank, which have offered billions of shillings in support.
According to the World Bank, the second repo will largely target sovereign bonds maturing in 2028 and 2031.
Besides the Sh117.6 billion Eurobonds due in 2027, there are another $1.5 billion (Sh196 billion) worth of bonds to be repaid by 2031, Sh156.8 billion in 2032, and Sh130.7 billion in 2034.
The principal of the 2028 Eurobonds must be repaid in one lump sum, while the remainder will be paid over three years.
The Treasury is likely to target a partial buyback of Eurobonds due in 2028.
The balance of Sh65.3 billion ($500 million) of Eurobond payments due for June 2024 is expected to be settled through a combination of financing from multilateral and bilateral lending and bank syndicated loans.
“The remaining portion of the 2024 Eurobonds not purchased in the tender offer will be financed through a combination of government funds and financing from multilateral and bilateral sources, including interbank loans,” Cabinet Secretary Njuguna Ndongo said in February.
“This diversified financing approach aims to maintain a relatively low weighted average interest rate in the overall public debt portfolio, ensuring Kenya’s debt sustainability over the medium term.”
However, Kenya's recent Eurobond buyback was done at a premium with the government accepting a higher interest rate for investors' bids in contrast to the yield that was settled during the first issuance of the note.
Rising interest rates in international capital markets mean the government is giving up the premium even as buybacks help ease liquidity and fears of default risk.
The World Bank had earlier warned Kenya of the continued high risk of debt distress following the costly buyback of Eurobonds.
The multilateral lender stressed that external borrowing has become more expensive than before the pandemic despite the ease of interest rate spreads.
Interest on new Eurobonds issued in February was 9.75 percent, compared to a 6.875 percent coupon on 10-year sovereign bonds that mature on June 24.
The recent reopening of international capital markets to sovereign issues by countries in Africa, including Kenya, Benin and Ivory Coast, has opened the window for the government to return to issues, helping to resolve some of the pent-up liquidity and financing pressures seen recently. Years.