Jittery investors force the Treasury to abandon plans to restructure Eurobond loans

National Treasury CS Ukur Yatani.

The National Treasury has dropped plans to reschedule payment of Eurobond loans, with the last week’s announcement spooking investors.

Yesterday, Treasury cancelled an earlier advertisement seeking the services of a “sovereign debt advisory firm,” - which gave an impression that all types of commercial loans including Eurobond loans would be restructured.

This roiled the market with investors fearing there would be a delay in the payment of their loans as it happened with Zambia. Treasury was forced to clarify that only syndicated loans given by commercial banks would be restructured. In the new international expression of interest, the Treasury instead talked of appointing a “Liability Management Operations Advisory Firm.”

“Debts held in international sovereign bonds are excluded,” read the notice.

Analysts, who spoke to The Standard on condition of anonymity fearing reprisals, said most investors might have interpreted the advertisement as a signal of possible refinancing on the cards.

“And until they get better messaging around what specific plans are, investors always assume the worst first and the better second,” said one of the analysts.

As part of its Post Covid-19 economic recovery strategy published in November last year, the National Treasury intends to prepare a debt restructuring strategy covering commercial and bilateral creditors.

The restructuring, according to the Treasury, is aimed at lowering the cost of debt by reducing its interest rate, reducing the refinancing risk and freeing up cash to be used for other critical public services such as healthcare.

The strategy will entail identifying potential debt in the portfolio that needs to structured and negotiate with creditors and potential lenders.

“The Government of Kenya has in the past conducted liability management operations on its local currency debt aimed at improving the debt maturing profile and aims to extend the same to a number of external syndicated credit facilities,” said Treasury in the revised advert that appeared in newspapers.

However, the analyst we spoke to noted that loans and local issuances are a different matter entirely and riskless from a reputation standpoint.

Analysts say that reprofiling (stretching time) or restructuring (stretching payments) on capital market issues is easy to talk about but hideous to do. “The knock-on effects of such changes can affect the Sovereign, but also the borrowings of local corporates, project financiers doing infrastructure,” said another expert, also on condition of anonymity.

Zambia last year opted to bow out of a Sh5 billion ($42.5 million) Eurobond repayment, becoming the first African nation to default on its debt in the Covid-19 era. Treasury is preparing for the fourth Eurobond with Kenya allowed to borrow up to Sh780 billion from the international financial markets under the three-year programme it has with the International Monetary Fund (IMF).

Treasury Cabinet Secretary Ukur Yatani (pictured) had initially expressed doubts about such expensive loans. 

A big chunk of this money will be used to refinance maturing loans. Treasury said the successful advisory firm will provide liability management advisory services to the State through the National Treasury - aimed at restructuring some expensive external debt.

This will help to lower their interest and the risk of default. Bidders should have five years of experience in providing sovereign debt advisory services in low and emerging economies.

This is also aimed at giving Kenya breathing space in the repayment of its debts, having so far benefited from a debt service suspension initiative under the G-20 countries. The six-month repayment holiday helped reduce debt service by about $640 million (Sh69.1 billion) in 2021. But some critics argued this was just a painkiller, noting that Kenya needed to undertake serious restructuring of its debt. Under the programme with IMF, Treasury will be allowed to issue Eurobonds of up to Sh508 billion, which will be used to refinance maturing loans.

Because Kenya doesn’t have enough foreign exchange reserves to retire all of its external loans, most of which are denominated in dollars, it has to borrow to repay some of the loans.

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