Kenya poised for Eurobond issuance

By:
Kanika Saigal
Published on:

Kenya’s debut and benchmark Eurobond is set to plug the deficit and to finance infrastructure, with analysts predicting that strong demand will offset any premium for political risk or fiscal laxity.

The long-awaited Eurobond from Kenya is expected to be issued in the latter half of the year, now that political considerations have died down after the peaceful election and the inauguration of Uhuru Kenyatta as the country’s leader, say analysts and bankers.
Kenyan president Uhuru Kenyatta being sworn in
“Now that the election has been concluded, the floodgates have opened,” says Greg Brackenridge, CEO of CfC Stanbic in Kenya. “Worldwide fund managers and institutional investors are looking for opportunities and Kenya is in their sights, and I would be really surprised if a Eurobond didn’t happen this year.”

Stuart Culverhouse, managing director and chief economist at Exotix, also expects the bond to happen this year. “The outgoing government has been discussing the issue of a Eurobond,” he says. “I would think that a Eurobond could be issued as early as the first half of this year.”

Yvonne Mhango, sub-Saharan Africa (SSA) economist at Renaissance Capital, says the issue will probably be around $500 million, though the government indicated in March that the prospective September issuance could be around $1 billion.

Brackenridge and Daniel J Connelly, CEO of Citi in East Africa, argue that the bond will more likely be around the $1 billion mark.

Says Connelly: “Kenya issued a syndicated loan in May last year for $600 million, so we expect the bond will be more than this to refinance the existing loan as well as to raise funds for upcoming aggressive government spending.”

The bond is also expected to come at a cheaper price than the syndicated loan, which was procured at a rate of 6.73%.

“Now that politics is out of the way, the Eurobond will go ahead and will be fairly priced,” says Habil Olaka, CEO of the Kenya Bankers Association.

Government costs

Kenya, rated B+ by Fitch and Standard and Poor’s, has run structurally high fiscal budgets in recent years, with spending likely to remain elevated as the government finances infrastructure to relieve stretched transport routes.

“There has been talk over a Eurobond for the last three or four years, but the chances of it happening this year are high,” says Ronak Gadhia, associate director at Exotix. “We predict the fiscal deficit could reach around 7% and its current account deficit is nearly 10%, so the bond will be a good way to get in some much-needed cash.”

Kenya would join the ranks of Eurobond SSA issuers Zambia, Ghana, Namibia and Nigeria. The sovereign had lacked the technical and debt-management capacity to absorb large-scale borrowing, while political pressures also contributed to the delay in offshore issuance.

“A few years ago, investors thought that Kenya – the strongest economy in east Africa and one of the strongest in the continent – would be at the top of the pack when it came to a Eurobond, but this wasn’t the case,” says Citi’s Connelly.

Nevertheless, some commentators argue that, aside from the international attention and prestige attached to issuing a Eurobond in a developing economy, there is little need for Kenya to even issue a benchmark bond.

While the government debt stock has increased, tax collection efforts have improved, boosting revenue, says Andre DeSimone, executive director of Kestrel Capital, based in Nairobi.

“On the one hand, issuing a Eurobond will give a certain status to the country, and will also give local companies benchmarks to borrow internationally,” he says. “But on the other hand, a Eurobond puts Kenya more at the will of foreign investors and at the mercy of foreign currency risk.

“If the government and corporations are able to fund their investments domestically with shillings, which they can easily do, would they really want to borrow in dollars and have greater foreign currency risk?”

Political risk

What’s more, there is a chance political risk could spook investors in the coming months as the International Criminal Court (ICC) case against Kenyatta and vice-president William Ruto gets under way this summer.

“As the case approaches in July, there will be a lot more pick-up in the media,” says Renaissance Capital’s Mhango. “This will no doubt affect investor appetite and we could see some revisions on people’s portfolios then.

“But there is a feeling that the ICC case is not as strong as it was a year ago. Initially six were charged and that number has dropped as key witnesses fell away. This could happen again.”

In addition, as DeSimone points out, most investors have priced in the risk associated with the ICC case. “The ICC case has not made any noticeable difference to investment,” he says.

“Kenyatta, despite what he is accused of doing, is seen by Kenyans as a pretty even-handed, reasonable guy. He’s young, modern and crosses tribal and economic divides.

“In general, the investment community is quite happy he has been elected, or at least happy the election was peaceful, and I doubt this sentiment will change any time soon.”

Given the pent-up demand for African bonds and the lack of yield available on benchmark government debt in the west – almost $20 trillion of global government bond market cap is now trading below 1%, according to Bank of America Merrill Lynch – it would be extraordinary if the prospective Kenyan bond failed to achieve aggressive pricing.