Kenya will on Monday faucet the worldwide bond marketplace for the primary time since 2021 to lift money to finance a buyback of the 10-year $2 billion (Sh321 billion) Eurobond, a transfer that has calmed investor jitters over whether or not the nation would afford to repay the debt when it matures in June.
The shock issuance marks a departure from earlier expectations that the Nationwide Treasury would finance the deliberate buyback utilizing the nation’s foreign exchange reserves or proceeds from loans from multilateral lenders.
The Treasury on Wednesday opened the tender supply for bondholders wishing to take part within the buyback, which has been priced on the bond’s par or face worth. It additional mentioned the buyback could be financed by the proceeds of the brand new Eurobond supply whose quantity was not specified.
Sellers can even be paid accrued curiosity on their bonds, whose most up-to-date curiosity cost was in January. Buyers had a constructive response to the announcement of the buyback and new bond sale, with secondary market yields on the 2024 bond that trades on the Irish Inventory Market falling from 13.6 p.c to eight.5 p.c inside an hour of the buyback disclosure on Wednesday afternoon. It traded at 9.6 p.c by 4pm on Thursday.
The secondary market motion of yield and worth is an indicator of the danger assigned to an issuer by traders—the place falling yields and rising costs sign waning threat aversion, and the alternative reveals rising threat considerations.
The value per $100 on the Kenya bond rose to $99 on Thursday, up from $97.50 earlier than the buyback announcement.
“The primary concern for traders has been whether or not Kenya would afford to afford the outsized obligation of $2 billion in direction of retiring the maturing bond. The constructive response to the buyback and new bond when it comes to the yield motion due to this fact reveals a degree of consolation,” mentioned Churchill Ogutu, an economist at IC Group (Mauritius).
“The expectation that Kenya will regain worldwide market entry primarily based on the buyback and the brand new bond, sentiment is ready to enhance on the foreign exchange market because of the potential elevated flows coming in over and above the loans from multilateral lenders.”
Kenya has stored out of the Eurobond market because it floated a $1 billion (Sh160 billion), 12-year paper in June 2021, on which it pays an rate of interest of 6.3 p.c.
Troublesome market circumstances within the intervening interval, the place yields or rate of interest calls for rose to as excessive as 22 p.c, have meant that the nation (and different African sovereigns) have been unable to faucet industrial debt, as a substitute counting on concessional financing from the Worldwide Financial Fund (IMF) and the World Financial institution.
Nonetheless, a profitable issuance of a dual-tranche $2.6 billion (Sh417 billion) Eurobond by Cote d’Ivoire on the finish of January at single-digit rates of interest of seven.88 p.c and eight.5 p.c has inspired Kenya to maneuver quick to benefit from the doubtless friendlier charges within the exterior bond market.
The maturing Eurobond, coupled with the earlier incapability to entry sizable exterior industrial debt has sat closely on the Treasury’s fiscal operations and the shilling over the previous yr.
The State had earlier indicated that it could lean on new greenback inflows from IMF and World Financial institution loans, and the nation’s foreign exchange reserves to repay the maturing Eurobond.
Financing a buyback or the June maturity from the nation’s foreign exchange reserves has been seen as a adverse for the shilling, whose stability is underpinned by the flexibility of the Central Financial institution of Kenya to iron out volatility utilizing these reserves, which stood at $7.13 billion (Sh1.14 trillion) on the finish of final week.
The brand new buyback plan has, due to this fact, handed the federal government a method out of the tough state of affairs, whereas the brand new bond issuance additionally opens an avenue to lift exterior financing in direction of its funds deficit for the present fiscal yr.
“If the principal quantity of the Notes exceeds the combination quantity of 2024 Notes tendered within the Tender Provide, the Issuer intends to utilise the stability for common budgetary expenditures,” mentioned the Treasury in a prospectus for the brand new Eurobond.
Within the present yr, the federal government expects to lift Sh363 billion in internet overseas financing, and Sh451.7 billion from home sources, to fill its funds deficit of Sh814.8 billion.
The Treasury has not positioned a cap on the worth of the Eurobond it can purchase again within the current transaction, that means that in case of a excessive subscription on the brand new bond, it can have a free hand in figuring out the allocation break up between the buyback and funds financing.