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Debt load sees Kenya's Treasury turn to regional bank for rescue

FINANCIAL STANDARD
By Otiato Guguyu | November 27th 2018
Members of the public watch as the first Standard Guage Railway (SGR) line passenger train snails out of the Mombasa Terminus Station

As the year comes to a close, Kenya is inching closer to settling its first Eurobond that has seen the money markets closely watch Treasury’s moves.

While Kenya’s Sh5.1 trillion loan is not a problem, the crisis seems to stem from most debts maturing at the same time or close to each other.

This calls for more talks with creditors. A Standard Gauge Railway loan, a Eurobond and syndicated debts are due as well as short-maturing local debts. Foreign debt, which stands at Sh2.6 trillion, also carries a currency risk since it is dependent on the exchange rate against the dollar which has been bullish of late.

While Treasury Cabinet Secretary Henry Rotich and his Principal Secretary Kamau Thugge have issued varied pronouncements over how the Government will deal with the dollar loan - suggesting a Eurobond, a syndicated loan or a mix of the two remains an option.

National Treasury officials say Rotich has been brooding over a private placement to raise cash from insurance and pension fund managers.

The move is meant to avoid a public auction that could question adverse ratings on the risk of the Kenyan debt issued by the International Monetary Fund. A source has told Financial Standard that Kenya has actually approached the Trade Development Bank (TDB), formerly the PTA Bank for a syndicated loan.

“They are the most likely to arrange as Treasury officials approached them,” the source said.

The lender did not respond to our queries on the deal. Known as the Eastern and Southern African Trade and Development Bank, the PTA Bank has in recent times become Kenya’s knight in shining armour.

It has arranged several loans worth several billions of shillings for Kenya and has even helped the country avoid an outright default. The country had borrowed a Sh75 billion loan which was maturing at the end of October 2017 had to be paid.

But being an election year with a looming crisis over a repeat poll, then Kenya was in no position to pay or even manage to arrange a loan to refinance it. Treasury went to the creditors and asked them to roll over the whole debt to be paid in another two years at the same terms.

However, much to the Kenyans surprise, 10 per cent, who cumulatively held Sh7.7 billion refused to roll it over. “We cannot reveal those who give us money so the jurisdiction or the countries that wanted an early settlement, I cannot give the details,” CS Rotich said.

“Those who wanted money upfront we paid them. The rest agreed on the six-month extension so by April, we will either get a syndicated loan or go back to the Eurobond market depending on our maturing obligations.”

CS Rotich sought an extension of six months within which he was able to convince the TDB to buy the loan and restructure it. The loan is now Sh77 billion from a Sub-Saharan lender which matures over seven years would be paid semiannually so that government is not under pressure to settle one big bullet payment.

Ever since borrowing the first Sh200 billion ($2 billion) Eurobond in June 2014 in one of Africa’s single largest Eurobond issue at a coupon rate of 6.785 per cent for the 10-year and 5.875 per cent for the five years.

Kenya has become increasingly reliant on the Burundi based bank. Out of the three Syndicated loans that the government has taken, TDB has played a role in two.

The Standard Bank arranged Sh71 billion) in October 2015, the Trade Development Bank Sh25.8 billion and another Sh80 billion from Standard Chartered, Standard Bank, Citigroup and Rand Merchant Bank also led by the TDB, earlier this 2017.

But saving Kenya which has shares in the Bank has not come without its own pitfalls. According to Global Capital, the loan issued last year created a furore on how Kenyan government officials and TDB treated the lenders by altering the terms of the deal.

The lenders even threatened to quash the deal if clarity did not provide. The lenders expected that the Sh25 billion component was a bilateral loan between TDB and Kenya and that the Sh80 billion would be the only syndicated portion only for the regional bank to try and syndicate the first tranche too.

“There shouldn’t be two deals of the same type at the same time in the African market and as of now, we don’t have any details on the type of deal the Kenyan government has with TDB.

The length of the tenor and the target market could be completely different from the one we’re going for. If it’s too similar it could delay our deal,” Global Capital quoted an official involved in the deal.

“A bilateral loan would be fine, but another syndication would cause a confusion in what is a pretty thin market. PTA Bank is a completely different operator than a commercial bank as it’s partly owned by a multitude of States, including Kenya,” The report by Dan Alderson quoted a Banker involved in the arrangement.

“We don’t know what to expect and it will be for the Kenyan government to provide that clarity. I can’t see the mandate going ahead without it.”

The deal did go through but will define future offers by the regional lender and the Kenya government as Kenya needs to restructure most of its loans at a time when dollar loans are expensive and African sovereigns are shattering confidence with heightened risks of default.

This has come back to haunt the Kenyan taxpayers who face dozens of loan maturities over the next couple of years beginning with the more than Sh380 billion Chinese loans borrowed to fund the Mombasa-Nairobi section of the SGR which is expected to kick in this financial year.

Next year will be trickier when the Sh75 billion five-year tranche of the Eurobond the country issued in 2014 will mature. TDB’s January Sh25 billion syndicated loan will also mature next year, requiring huge payouts.

And by 2020 the Sh80 billion three-year loan from a syndicate of Citi, Standard Chartered and Standard Bank South Africa will be due for repayment.

Analysts say Kenya has growth prospects and has the talent and negotiators that can take a huge chunk of the debt, package it into one and sell it on the open market for a lesser rate or longer maturity essentially called debt restructuring.

Borrowing new debt to settle the old one or refinancing will only incur expensive debt to settle cheaper loans. Kenya operates in a global economy and while post-2008 global financial crisis meant Americans were printing money and lending rates were as low as 0.25 per cent, the debt was affordable.

African countries were issuing bonds at an average of six per cent and lately at an average of eight per cent yet they celebrated oversubscription while foreign creditors were laughing all the way to the bank.

Now the lending rates set by the US Federal Reserve Bank are at two per cent, oil is rallying and the shilling also poses a risk which could see future loans become inevitably more expensive.

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