Why Kenya Isn’t Out of Wood Yet Despite Fresh International Bond Sale

Kenya announced its first international bond sale since June 2021, seeking to raise $500 million for budgetary purposes and to buyback part of $2 billion eurobond due on 24 June 2024.

Financing the partial buyback of the Maturing 2024 Eurobond through new issuance will help remove uncertainty over Kenya’s ability to service its debt, enhancing investor confidence and potentially lowering future borrowing costs.

The bond issuance is a quicker means of securing funding than syndicated loans.

Although the issuance will alleviate short-term debt repayment pressure, Moody’s says Kenya still faces a challenging amortization profile after the June eurobond payment.

“In July 2023, when we confirmed Kenya’s ratings, we assumed that the government would meet its 2024 external amortizations even without market access.

We expected financing to come from a combination of increased multilateral financing and commercial financing mostly through syndicated loans,” said Moody’s in its Markets Outlook Report released on February 12, 2024.

The rating firm also said, “to the extent that bond issuance replaces the need for future syndicated loans to cover financing requirements, the effect on Kenya’s cost of funding is broadly neutral.”

In the fiscal year ending June 2023, Kenya borrowed around $800 million through syndicated commercial loans.

At Least $3 Billion in Annual Financing

The terms of the upcoming bond issuance are comparable to those of the syndicated loans, but with a slightly longer maturity, while locking in a higher interest rate.

After 2024, Kenya will need more than $3 billion in annual external financing just to meet its external debt service needs.

Its needs include nearly $2 billion per year owed to private creditors and Chinese bilateral creditors, two groups for which refinancing can come at a higher cost of borrowing and lack predictability.

The Waek Shilling Effect

The combination of the Kenya shilling’s 21% depreciation against the US dollar in 2023 and a rise in domestic borrowing costs has significantly deteriorated Kenya’s credit metrics despite a narrowing fiscal deficit.

Kenya’s domestic borrowing costs rose sharply throughout 2023 and into 2024, with Treasury bill yields increasing to more than 16% in January 2024, compared with below 10% in December 2022.

Yields on longer-dated Treasury bonds have also increased, despite shortening the average maturity of newly issued debt.

“This higher cost of domestic borrowing has significantly weakened our expectation for Kenya’s interest-to-revenue ratio compared to our forecast at the time we confirmed Kenya’s B3 rating in July 2023.”

Fresh Bond Sale

Kenya signed a memorandum of understanding (MoU) on February 9, 2024, with Nippon Export and Investment Insurance (NEXI) to issue a Samurai Bond worth $500 million in two phases of $250 million each.

A Samurai Bond is a Japanese yen-denominated bond issued in Tokyo by a non-Japanese entity and subject to Japanese regulations.