Economy
The Treasury plans to avoid 280 billion shillings in Eurobond payments
Monday, June 26, 2023
Kenya expects the shilling to weaken further to 150.76 by the time it pays off its Eurobonds for the first time in June 2024. FILE PHOTO | stock struggle
Kenya’s plan to buy back at least half of its Sh280.8 billion ($2 billion) debut eurobond, which matures in June next year, is expected to ease financial pressures from the big-ticket redemption.
The move effectively cuts the redemption process in half, reducing the burden on the Treasury that would have been required to make a large quick payment to sovereign bond investors in one go.
Investors viewed the planned buyback, which President William Ruto announced last week, as part of managing government obligations to mitigate the impact of higher debt-service costs from an expected maturity.
“I want to promise them (investors are worried about Kenya’s ability to repay) that we’ll get half of it back before the end of the year and we’ll scrap that before the time runs out next year. We’re in a good place,” President Ruto told Bloomberg TV last week.
An early redemption would see the government buy back the bonds from investors via secondary trading at a market-determined price that is linked to the yield associated with the security.
is reading: The Treasury is facing renewed interest rate pressure in selling bonds in June
While President Ruto has not disclosed the means by which Kenya will pay for the early redemptions, analysts believe the country could benefit from its recently replenished foreign currency reserves.
Kenya’s official foreign exchange reserves rose again above the minimum equivalent of four months of import cover after the recent disbursement of Sh140.4 billion ($1 billion) from World Bank development policy operations.
The hard currency cover used in part to offset outstanding foreign debt payments was boosted by the receipt of Sh112.3 billion ($800 million) from the joint facility with another Sh14 billion ($100 million) tentatively expected before June 30.
is reading: The forex buffer rises to over 4 months of World Bank loan coverage
In addition, new payments from the International Monetary Fund in July, estimated at 57.6 billion shillings ($410 million), are set to boost reserves.
“Looking at things, we are seeing foreign currency reserves drop to $1 billion which have recently been boosted by external financing inflows and have seen reserves reach at least $7.5 billion. Another alternative could be to issue another IB to refinance this deal, but that may This is only possible when returns fall significantly to single digits.
Combined with the maturities split on the Eurobond for the first time, an early redemption would see Kenya save a portion of Sh20.2 billion in interest payments to investors between now and the bond’s maturity date.
is reading: The state expects the shilling to drop to 150 marks against the dollar next June
However, the buyback will come at a premium as bond prices rise while yields on Kenyan dollar bonds fall. The debuting Eurobonds attract a coupon of 6.875 per cent payable semi-annually.
The country would have booked larger savings if it had redeemed a portion of the bonds months earlier when yields in secondary circulation peaked.
Investors appeared to get wind of bond buybacks ahead of Thursday’s announcement, which further slumped yields and rebounded dollar bond prices to signal confidence in Kenya’s ability to fully recover its Eurobonds.
Kenya’s dollar-denominated bond yields continued to fall at the start of the week as investors weigh reports that the country is weighing options, including a possible buyback of part of $2 billion in bonds due next year. Note yields have fallen to levels last seen in March, Tellimer Insights said in a note published on Wednesday.
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