Cash-starved Treasury launches process towards fourth Eurobond

The National Treasury has started the process of wooing investors for the country’s fourth Eurobond to be used to plug the budget hole left by poor revenue collection.

In its preliminary prospectus, the National Treasury indicated that it intends to use the proceeds “for general budgetary expenditures".

The government has tapped the services of American banks Citigroup and JP Morgan as joint lead coordinators while I&M Bank and NCBA Group will be co-managers of the bond.

Through a virtual roadshow that started yesterday, Kenya seeks to raise an unspecified amount of debt through 12- and 15-year notes, Bloomberg, a business news outlet, reported.

Kenya has so far borrowed close to Sh600 billion by issuing Eurobonds, which are dollar-denominated sovereign bonds.

A communication official at the National Treasury said he did not have details of the issuance.

However, a source at the ministry who requested anonymity said the prospectus will be firmed up by end of tomorrow, by which time Kenyans will have known how much the country intends to raise.

The Budget Policy Statement 2021, a report that sets out the country’s development plans, had indicated that Treasury intended to raise a sovereign bond of Sh123.8 billion in the 2020-21 financial year.

For the 2021-22 financial year, the plan is to raise Sh124.3 billion.

The government also intended to raise another Sh220 billion for refinancing the Eurobond that is to mature in 2024, but those plans were put off after the bondholders got jittery.

Towards the end of April, Treasury was forced to cancel an earlier advertisement in which it sought the services of a “sovereign debt advisory firm,” with noteholders fearing that all types of commercial loans including Eurobond loans would be restructured.

News about Kenya issuing its fourth Eurobond follows the National Treasury's tabling of its second Supplementary Budget for the financial year ending this month.

In the mini-budget, Treasury noted increased budget deficit to 8.6 per cent of the gross domestic product (GDP) from 7.5 per cent.

It had already indicated that should the country not be able to get sufficient cheap loans from multilateral institutions such as the World Bank and the International Monetary Fund (IMF), then they would be forced to issue another Eurobond.

Analysts say Kenya is taking advantage of the prevailing low interest rates, with cash flowing from developed countries following an extended period when interest rates were kept down and central banks poured a lot of money into their economies in a bid to fight Covid-19 pandemic.

“From a timing perspective, global yields are still low so there will be investor appetite for higher yielding securities which the Kenyan sovereign bond will offer,” said Genghis Capital Head of Research Churchill Ogutu. 

He added that investors might also warm up to the country’s deal with the IMF, which is supposed to ensure Kenya maintains some semblance of fiscal discipline by increasing its revenues and cutting wasteful spending.

Kenya will also be buoyed by the fact that a number of countries such as Ghana and Gabon have successfully issued Eurobonds.

Earlier, the IMF identified 51 projects where Kenya will be expected to invest the Sh248 billion Eurobond cash it is expected to raise for development activities in the next three years.

In steps aimed at preventing a repeat of the opaque spending of the previous Eurobond, the government will be required to spend the money on high-yielding projects aimed at spurring growth and reducing poverty.

Any attempt to spend the money on other items, the IMF warned, could lead to the termination of the loan programme that is aimed at improving the country’s deteriorating fiscal position.

Besides President Uhuru Kenyatta’s Big Four Agenda of manufacturing, universal healthcare, food security and affordable housing, the money will also be pumped into projects aimed at improving infrastructure, education and energy.

It will also be used to enhance security, protect and manage the environment and to expand the courts.

“Any contracting or guaranteeing of non-concessional external debt for projects other than those listed in Annex I results in the non-observance of the performance criterion,” said the IMF in a detailed report.

Just as other previous Eurobonds issued by Kenya, these notes will be traded at the London Stock Exchange.

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