The Sh8b question as banks bail out Government to help it repay loan

President Uhuru Kenyatta recently ordered the Treasury Cabinet Secretary to pay Sh1.4 billion Anglo Leasing debt.

By James Anyanzwa and Moses Michira

Kenya: Even with the best of intentions, governments can get their policies wrong. In many such cases, policy makers will choose to go ahead with implementation without a proper cost-benefit analysis.

The result of these misguided policies can have damaging long-term consequences on a country.

Last week, the Jubilee Government found itself in a difficult bind when it was forced to pay Mr Anura Perera, the man at the heart of the Anglo Leasing-linked procurement deals, Sh1.4 billion.

Mr Perera has since issued fresh demands for an additional Sh3.05 billion.

To many, paying the Sri Lankan businessman off was a prime example of Government failure; a policy with good intentions that failed to achieve its objectives and caused a much bigger problem.

The Government had said it would be unable to float the much-talked about $2 billion (Sh175.6 billion) without settling the claim. Now, it is unclear if Perera’s new demand will still affect the issuance of the bond, which is scheduled for June.

Part of the proceeds of the bond are to be used to settle a Sh52 billion syndicated loan and fund infrastructure projects.

It is this syndicated loan, which was due this month, that reportedly prompted the unusual settlement of Perera’s claim.

Citi Bank Group, Standard Chartered PLC and Standard Group are the lead arrangers and underwriters of the syndicated loan.

An interview granted by the bankers revealed for the first time just how much the loan signed by former Finance minister Njeru Githae on May 15, 2012, will cost the country.

Originally, the loan was priced 4.75 per cent above the 0.23 per cent Libor (London Inter-Bank Offer Rate), which is the most widely used benchmark for short-term interest rates.

Kenya would pay a total of Sh5.2 billion in interest over the two years — an unavoidable price to pay to shore up foreign exchange reserves that had come under pressure at the Central Bank.

Mr Githae had also hoped the loan would help ease heavy borrowing from the local market, where the State was starving the private sector of capital.

Arrangers of the loan, the three international banks that also insured the deal, would earn Sh1.46 billion — 2.8 per cent of the principal amount.

Costly decision

What was unforeseen, however, was that Kenya would be unable to repay the loan on the agreed date, May 15, 2014.

When that Thursday rolled around, the vaults at CBK were virtually empty, according to Dr Kamau Thugge, the Treasury permanent secretary.

Dr Thugge told reporters that if Kenya had paid back the loan, it would have been a very costly decision.

The Government was considering repaying the loan with foreign exchange reserves held at the Central Bank, a decision that would disproportionately expose the economy to a dollar crisis.

Crucial imports such as petroleum are paid for in dollars, and the State needs maintain a healthy import cover, just in case there is a major interruption in new foreign currency inflows.

It is this situation that sent top Government officials, including President Uhuru Kenyatta, into a panic to the point of giving in to Perera’s demands.

The country then appealed to the international banks to give it more time to repay the loan with money borrowed from other lenders through the Eurobond.

This deferral, however, cost taxpayers an extra interest payment of Sh652 million, in addition to a commission fee of Sh574 million.

The appeal for an extension also exposed just how much of a financial crisis Kenya is in after Treasury issued an order shutting down procurement spending in all Government departments.

The order was lifted after payment was made to Perera, who owns First Mercantile and Universal Satspace.

Business Beat has established that the two-year loan, which now matures in mid August, will cost Kenyans no less than Sh8 billion in arrangement and extension fees, and interest.

“We are a commercial entity and the extension has been favourable to us. We are earning interest, in addition to the extension fee,” a transaction advisor, who asked not to be named due to the sensitivity of the issue, said.

Syndicated loan

Mr Kenyatta was forced to explain his “painful” decision to direct Treasury to settle the Anglo Leasing debt, even though he had always maintained that the money should not be paid out.

The President said settling the claim would pave way for the issuance of the Eurobond, which is the only realistic avenue left for the State to repay the syndicated loan, which is now due on August 15.

He added that proceeds from the proposed bond are also expected to help plug a Sh329 billion deficit in the country’s national Budget, while failure to attract lenders could mean cutting back on Government services.

“With less than two months to go before the end of the financial year, the choice was either to start cutting back on Government expenditure, to start cutting back on programmes and service delivery to Kenyans, or to pay in order for us to move forward as a country,” he said.

Cabinet Secretary Henry Rotich also disclosed the country’s desperation over the funding crisis, telling Business Beat there would be major cutbacks in Government spending in event the Eurobond, which is factored in 2013/14 Budget, is not successful.

Kenya has put off issuing the bond several times since September last year, ostensibly because of the legal challenges presented by non-payment of the Anglo Leasing claims. But when the syndicated loan fell due, Kenya found itself in an unenviable position.

While top officials could not openly talk about their distress, some of the small lenders who provided the Sh52 billion loan were worried about Kenya’s ability to repay the money, and wanted out.

Business Beat’s source reveals that as Treasury officials pleaded for more time, the underwriters were forced to buy out edgy lenders.

Difficult position

“Any lender who did not wish to stay on was paid off,” he said, adding that the underwriters bought loans worth about Sh17 billion ($200 million). 

“There are additional interest costs that would be borne; banks are not a charity.” 

In total, Kenya will now pay a minimum Sh60.1 billion for the syndicated loan.

The bigger concern, however, was that the revised repayment schedule would affect the country’s creditworthiness. Investors are wary of putting their money in risky assets, such as in sovereign bonds issued by countries with low credit ratings.

Fortunately for Kenya, international credit rating agencies retained a favourable credit score for the country, terming the extension a mere debt and reserves management strategy.

Ratings agency Fitch, for instance, said Kenya’s need to extend the loan repayment highlighted the refinancing risk inherent in African nations, which are now turning to international markets for financing, rather than relying on concessional loans.

“We understand that if the Eurobond has not been issued by August, the syndicated loan will be repaid out of reserves.

“It is not the case that without the extension, a missed interest or principal payment would be likely. [The extension] will, therefore, have no impact on Kenya’s sovereign rating.”

Avoid disruption

According to the source, the Government did have the option of paying off the syndicated loan because it had enough shillings to buy dollars from CBK, or it could have utilised its foreign exchange reserves at CBK

But acting on the advice of its lead arrangers, Treasury sought an extension of the loan repayment by three months to avoid disrupting the money market.

National Treasury Cabinet Secretary Henry Rotich and Thugge believe that within this period, the proceeds of the anticipated June Eurobond will be in the consolidated fund — the Government’s main bank account.

Treasury mandarins are now crossing their fingers the bond gets a full subscription.

However, taxpayers are expected to pay a premium prize for the cash raised.

With international lenders waiting in the wings for their dues, the Government has been forced to tap into the international debt market at a time when interest rates are heading north.

“Economic activities are picking up in Europe and interest rates are likely to go higher. Right now, the rates in the international markets are ranging between six and eight per cent, and given that we are issuing a long-term bond, the rates shall be higher than these,” said the source.

“We could have gone to the market a year ago and borrowed at four per cent. Rwanda borrowed at four per cent last year — we could have done the same.”

In addition to prevailing market conditions, credit ratings also determine borrowing costs.

A credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of a country. The better the rating, the more likely a country is to pay back borrowed funds, which enables it negotiate for lower interest rates.

Standard & Poor’s credit rating for Kenya stands at B+, Moody’s rating is B1 while Fitch’s credit rating for Kenya is B+. In general, this means the country’s economy is considered stable, and international investors can expect Kenya to pay its bond obligations.

Credit ratings are not based on mathematical formulas, rather, they rely on analyses of a country’s history and its long-term economic prospects.

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