Kenya Gambles on Double-Digit Interest Rate to Dodge Funding Crunch

Kenya was forced to offer a double-digit interest rate on new government bond on Monday so it could to push back until 2031 a $2 billion payment crunch that had been looming in June.

The sale of the $1.5 billion, seven year bond concluded a frantic debt liability exercise but came at a price, with investors getting a 10.375 percent yield.

That compared to the 6.875 percent on the bonds they were replacing and was by some margin the highest rate offered at any sovereign debt sale so far this year.

The banks running the book said the juicy interest rate had meant demand stood at more than $3.6 billion at one point and pushed the final rate down from an originally-floated 11 percent.

“In theory no sovereign should issue at these levels and given that they have access to concessional lending (from multilateral development banks) really they should be using that,” Viktor Szabo, an emerging markets portfolio manager at abrdn said.

“But they had a $2 billion bond maturity in June so they kind of had to. It was probably too big a hole to fill with the multilateral funding.”

Kenya’s public debt is estimated to have reached 73 percent of GDP by end-2023, the International Monetary Fund said last month, with debt service consuming about 55 percent of revenues.

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African counterparts Ivory Coast and Benin have also successfully issued new international market bonds this year.

The 10-year, June-maturing bond Kenya is swapping was trading with a yield of 8.95 percent on Monday, while another 2032 bond was trading at 10.25 percent, according to Tradeweb data.
The prospects of Kenya successfully resolving the maturing dollar bond has boosted sentiment in the currency market and the shilling currency has posted gains against the dollar since last week.

The news of its return to the market follows the conclusion of an enhanced funding deal with the International Monetary Fund last month.

Treasury Cabinet Secretary Prof Njuguna Ndungu said the government is pleased to announce the successful pricing of a new 9.75 per cent $1.5 billion Eurobond due in 2031.

“This will amortize ni three equal instalments ni 2029, 2030 and 2031, resulting in a weighted average life of 6 years. The 2031 Eurobonds have an issue price of 97.270 per cent, yielding 10.375 per cent.”

“Kenya received strong demand, with a high-quality order book exceeding $6 billion, allowing for tighter pricing and an increased issuance compared to initial guidance. The proceeds from the 2031 Eurobonds wil fund the offer to buy Kenya’s existing $2 billion Eurobonds due ni 2024, pending demand ni the Tender Offer,” he said.

Results are expected on February 15, 2024, he added.

The combined transactions, he said are a crucial part of the government’s strategy to smoothen the maturity profile of the 2024 Eurobonds and proactively manage debt liabilities.

The remaining portion of the 2024 Eurobonds not purchased in the Tender Offer will be funded through a mix of the government funds and financing from multilateral and bilateral sources, including bank syndication.

This diversified financing approach aims to maintain a relatively low weighted average interest rate ni the overall public debt portfolio, ensuring Kenya’s debt sustainability over the medium term, he argued.