Poor Fitch rating to muddy Kenya's fifth Eurobond bid

 

International lenders are now likely to charge Kenya much higher interest rates on the planned fifth Eurobond after Fitch downgraded the country's creditworthiness.

The credit rating agency on Thursday last week revised Kenya’s long-term foreign currency issuer default rating to negative from stable and affirmed it at ‘B’ meaning the country stands at a high risk of loan defaults.

According to the agency, the rating affirmation balances Kenya's relatively high government debt and external indebtedness and its narrow revenue base.

Experts say the negative rating poses a high credit risk, a move likely to make lenders extra cautious at a time the country is in the market for the fifth Eurobond to repay the inaugural one taken in 2014. 

The $2 billion (Sh283.6 billion) facility is due this financial year. 

"The new Eurobond is unlikely to be priced at below 10 per cent but to be noted is the emerging market debt spreads with US equivalent are at low hence reflects a complacency to risk transmission from advanced economies,’’ Mihr Thakar told the Star.

His sentiments are echoed by James Mugo who says the continued credit downgrades are sending negative signals to lenders in the international market.

"This is likely to see them lend cautiously. I foresee a double-digit interest rate,'' Mugo told the Star. 

Early this month, Kenya secured a $500 million (Sh70.4 billion) syndicated loan arranged by a consortium of five international lenders, with the proceeds expected to fund ongoing development projects approved in the just-ended financial year.

They also did not disclose the interest terms of the syndicated loan.

"International lenders are looking at how the government is pricing domestic debt. We have seen it hit a 15 percent ceiling. The high-risk status can easily hand us rates above 10 per cent internationally,''

Apart from Fitch, several other reputable international lenders and rating firms have doubted Kenya's ability to honour debt obligations on poor revenue collection and shilling run against major currencies. 

Two months ago, Moody’s downgraded the country’s foreign currency issuer ratings from B2 to B3.

It classified Kenya as “high credit risk” and just one level above “very high credit risk”.

 Moody’s cited rising liquidity risk for the government as the reason for the downgrade.

“The rating downgrade is driven by an increase in government liquidity risks. Domestic funding conditions have deteriorated considerably over the past two months with very low net domestic issuance contributing to financing shortfalls,” Moody’s said.

The country also received similar treatment from both IMF and World Bank who doubted its ability to repay due loans. 

Last month, four banks were shortlisted as potential lead arrangers for the planned return to the global financial markets between July and June 2024 for the fifth Eurobond.

Citigroup, JP Morgan, Standard Bank and Standard Chartered Bank made it to the short-list for the planned issuance.

The selection process began in April this year, with the Treasury publishing a request for expression of interest for international lead managers for issuance of a sovereign bond.

In May, the National Treasury Principal Secretary Chris Kiptoo said the government was at an advanced stage of selecting lead arrangers for the Eurobond slated for issuance in the current financial year.

The country is currently facing a myriad of financial turmoil including the depreciation of its currency which has dropped 18 per cent in 12 months and sluggish economic growth. 

Already, yields on the 10-year bonds maturing in 2024 and 2028 have risen sharply and continue to spike amid the interest rates hike announcement by major central banks, signaling higher repayment costs.

According to the weekly bulletin by CBK, yields on the 2014 Eurobond almost doubled to about 12.1 per cent in the week ended July 21.  This facility was issued at a coupon rate of 6.9 percent. 

Last year, Kenya cancelled the planned $1 billion issue, citing high-interest rates in the wake of Russia’s invasion of Ukraine.

The exchequer, instead, opted to borrow locally, saying bids received on what could have been Kenya's fifth Eurobond hit a high of up to 12 per cent.

In Kenya, the now muddied path towards a return to the foreign market follows the previous issue which was hugely oversubscribed.

In June 2021, Kenya issued it's fourth Eurobond worth $1 billion (then Sh108 billion) at an interest rate of 6.3 per cent for the 12-year.

The oversubscribed commercial paper attracted bids worth Sh582.7 billion ($5.4 billion).

The 2019 bond raised $2.1 billion, which was in two tranches of $900 million priced at seven per cent for a seven-year paper and eight per cent for a 12-year, $1.2 billion tranche.

The one issued in February 2018 raised $2 billion in two equal tranches of $1 billion, paying 7.25 per cent for the 10-year paper and 8.25 per cent for the 30-year option.    BY THE STAR