Kenya will take a Sh10.3 billion hit from higher interest rates on a new dollar bond tapped Wednesday to repay a cheaper $900 million Eurobond due from May.
The Treasury raised $1.5 billion (Sh193.95 billion) from the sale of an 11-year sovereign bond at an interest rate of 9.5 percent, with investors willing to lend Kenya $4.9 billion (Sh633.6 billion), attracted by the high returns.
Proceeds from the bond will be used to retire the $900 million (Sh116.4 billion) bond that Kenya tapped in 2019 at a rate of seven percent.
The new bond will pay its investors annual interest of $142.5 million (Sh18.43 billion), compared to the $63 million (Sh8.15 billion) that was being paid on the retired 2019 bond per year, reflecting the Sh10.3 billion hit.
Had the government limited its uptake of the new bond to $900 million to match the buyback paper, the interest rate difference would have been equivalent to Sh2.9 billion.
Treasury Cabinet Secretary John Mbadi said that the additional $600 million (Sh77.6 billion) that the government took up from the bond, will be used to retire existing syndicated loans that are due for repayment in the near term, as opposed to filling the current year’s external borrowing target.
The bond’s offer document had said that these additional funds would either go towards general budgetary expenditures or the refinancing of other external indebtedness.
“Proceeds from the 2036 Eurobond will be used to refinance existing external debt, including the planned buyback of Kenya’s $900 million Eurobond maturing in 2027,” said Mr Mbadi in a statement.
“It aligns with the government’s strategy to smooth the maturity profile of Kenya’s external debt and proactively manage public debt liabilities.”
The refinancing of external debt through buybacks and new issuances are, however, coming at a higher cost for the taxpayer, reflecting a deterioration of the country’s risk profile among international investors since the 2019 bond was issued.
In the period, all three major global ratings agencies have downgraded Kenya’s sovereign rating by two notches. S&P Global and Fitch have both downgraded Kenya’s rating to “B-” from “B+” over the past five years, while Moody’s rating has gone down from “B2” to “Caa1”.
Investors are guided by these credit ratings when lending to a country. The higher the rating, the lower the risk premium attached to new debt, meaning that they demand lower compensation to lend to the country.
Global financing conditions have also changed over the past few years, with interest rates going up in the West, resulting in higher costs of borrowing for countries in the international debt market.
When Kenya issued its debut Eurobond in 2014, the interest charge on a $750 million (Sh97 billion), five-year tranche settled at 5.875 percent, while a $2 billion (Sh259 billion), 10-year option came with an interest rate of 6.875 percent.
The second issuance in February 2018, comprising a pair of 10- and 30-year bonds of $1 billion (Sh129.3 billion) each, carried interest charges of 7.25 percent and 8.25 percent respectively.
The third issuance, which included the now-bought-back seven-year, $900 million paper and a 12-year, $1.2 billion (Sh155.2 billion) tranche, had rates of seven percent and eight percent respectively.
The rate demands fell in a 2021 issuance of a 13-year, $1 billion bond that carries a coupon of 6.3 percent.
However, global interest rates rose after Russia’s invasion of Ukraine in February 2022 set off higher inflation, making it difficult for smaller economies like Kenya to access global credit markets at an affordable price.
Locally, a weakening shilling and dollar supply hitches throughout 2023 raised the country’s risk profile further, pushing Eurobond yields in the secondary market to record highs of up to 21 percent.
The market jitters eased sufficiently in early 2024 to allow the country to return to the sovereign bond market in February to refinance the 10-year 2014 Eurobond, (which was due to mature in June 2024) through a fresh issuance that raised $1.5 billion at a rate of 9.75 percent.
The interest charge per year on the 2024 bond stands at $146.25 million per year (Sh18.9 billion), which is higher than the $137.5 million (Sh17.8 billion), that the country was paying on the 2014 bond it replaced, despite the latter being $500 million more in terms of the borrowed amount.
