Controversial Eurobond loses value at Irish Stock Exchange

The value of Kenya’s Eurobond has fallen to record low level resulting in massive losses for investors, dimming the country’s prospects of success in future international bond issues.

Analysts have linked the fall to events in Kenya where disbursement and spending of the bond proceeds have driven a wedge between the Opposition and Government over claims of lost cash.

Yields on the original issue of $2 billion (Sh200 billion) climbed to 9.23 per cent on Tuesday, to ensure the value of Kenya’s bond was the lowest among all developing countries, which have issued sovereign bonds.

“A significant portion of the increase in yield that we’ve seen recently has been due to the ongoing controversy regarding the management of the bonds,” John Ashbourne, an Africa economist at Capital Economics in London told Bloomberg news agency.

The climb in yields, however, does not affect the interest payments throughout the life of the bond issued in two tranches, five and 10 years.

Investigations on how the proceeds of the Eurobond were spent are underway, with the Ethics and Anti-Corruption Commission taking statements from National Treasury Cabinet Secretary Henry Rotich and his Principal Secretary Kamau Thugge.

Both officials, who have claimed innocence over the claims of mismanagement of the borrowed cash, have warned several times that the debate around the Eurobond was affecting investors’ confidence in the country’s sovereign bond.

Close market observers reckoned that lower confidence has the potential to drive away prospective lenders, and raise the risk profile - which translate to even higher cost of futyre borrowings. An immediate concern for Kenyan is how the investors will perceive of the country should it chose to borrow in the international markets through a similar bond in the future.

The ensuing standoff in Kenya has dented the image of the country among investors who have now attached a higher risk to the sovereign bond.

But it is not the management of the bond alone that is eroding the value of the Eurobond, which is listed at the Irish Stock Exchange. Global anticipation of a rise in the interest rates in the US has seen massive capital flight around the World, with investors dumping their assets in developing countries debt securities in anticipation of investing in the American debt market.

US has kept down its interest rates since the global financial crisis to stimulate domestic borrowing and encourage consumption.

Time was right for an interest rate hike this month, top officials of the US Federal Bank have said repeatedly, and this is expected to offer incentives for investors to invest their funds in the World’s biggest economy.

The impending rate hike will significantly strengthen the US dollar to expose countries with dollar-dominated debt, such as Kenya’s Eurobond. Kenya will require more shillings to repay its foreign dollar loans after the depreciation of the domestic currency – to raise the chance of default.

In 2015 alone, the shilling has depreciated by more than 13 per cent to the US dollar, with that raising its debt by a similar proportion in the home currency, even though the amount does not change in the foreign currency it is to be rapid in.