Eurobond ghosts haunting Kenya as dollar strengthens

The international commercial papers accounts for 10 per cent of Kenya's total debt

In Summary
  • Yesterday, the shilling traded 117.2, up from 108 a year ago.
  • The yield on the 12-year bond due in 2032 jumped to 10.14 percent from 9.43 per cent.
Treasury. Photo/Monicah Mwangi
Treasury. Photo/Monicah Mwangi

Kenya is set to pay almost double intrests on past two Eurobond issues on strengthening US dollar that is climbing at the fastest pace in 20 years.

Yesterday, the shilling traded 117.2, up from 108 a year ago.

This is attributed to volatilities in the international market, fueled by Covid-19, Ukraine crisis that has resulted to high inflation, forcing rich countries like the US raise their base lending rates.

This is likely to push up the country's debt obligation, parhaps a reason why the National Treasury has shelved plans to float another $1 billion before end of this financial year.

According to data from the Central Bank of Kenya (CBK), yields on the 10-year Eurobond maturing in 2024 have risen by 147 per cent in the year to date while returns on the 30-year paper maturing in 2048 are up by 34.9 per cent.

The spike in Eurobond yields is biased towards the shorter end of the yield curve pointing to an assessment of near-term risks by investors in the bonds.

Kenya’s fiscal plan which sees it balance financing from both domestic and international markets has forced Treasury’s hand in seeking funding from the international capital markets as its scope for local borrowing closes.

On Wednesday, the National Treasury Cabinet Secretary Ukur Yatani said Eurobonds had become expensive in the wake of Russia’s invasion of Ukraine forcing Kenya to reconsider issuing a bond.

Kenya had picked Citi and JP Morgan as joint book-runners for a dollar-denominated sovereign bond issue this year but stalled after the loans became too pricey.

The exchequer  has decided to go for syndicated loans from international market, saying bids recieved on what could have been Kenya's fith Eurobond hit a high of upto 12 per cent.  

The yield on the 10-year bond due in 2024 jumped to 8.55 per cent on April 27 from 7.18 per cent on April 20, according to the latest data from the Central Bank of Kenya.

That on the 10-year bond due in 2028 increased to 9.76 per cent from 8.92 percent over the same period.

The yield on the 12-year bond due in 2032 jumped to 10.14 percent from 9.43 per cent.

In June lst year, Kenya issued its fourth Eurobond worth $1 billion (then Sh108 billion) at an interest rate of 6.3 per cent for the 12-year.

The oversubscribed commercial paper attracted bids worth Sh582.7 billion ($5.4 billion).

The 2019 bond raised $2.1 billion, which was in two tranches of $900 million priced at seven percent for a seven-year paper and eight percent for a 12-year, $1.2 billion tranche.

The one issued in February 2018 raised $2 billion in two equal tranches of $1 billion, paying 7.25 percent for the 10-year paper and 8.25 percent for the 30-year option.

The rise of the yield — which measures the return an investor gets from buying the fixed income securities — comes as major central banks, including the Federal Reserve of the US are expected to raise interest rates significantly to dampen inflation.

Investors typically demand higher returns from debt of emerging and frontier countries such as Kenya which are seen as relatively high-risk compared to obligations of the US and European governments.

Kenya’s commercial debt is mainly in Eurobonds with an outstanding portfolio of six worth a total of $7.1 billion (Sh830 billion), which are traded on the Irish and London stock exchanges.

This accounts for 10 per cent of the country's total public debt that stood at Sh8.4 trillion as at March. 

On Wednesday, the Parliament approved plans to raise the country's debt ceiling from Sh9.1 trillion to Sh10 trillion.