Kenya to use World Bank loan to clear Sh65bn Eurobond


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Kenya will use part of the recently obtained Sh156.8 billion loan from the World Bank to clear the outstanding balance of Sh65.3 billion ($500 million) from its first Eurobond maturing on June 24.

The final sovereign bond payment for 2014 is expected to allay investor fears that contracted foreign exchange inflows last year and led to a sharp decline in the value of the Kenyan shilling.

Last week, the World Bank's Executive Board approved the disbursement of 156.8 billion shillings ($1.2 billion) to Kenya, with the proceeds expected to be partly distributed in easing current government financing constraints.

“Part of the amount will be used to settle the remaining $500 million Eurobonds,” Central Bank of Kenya Governor Kamau Thog said at a press conference on Thursday.

The government took a multi-pronged strategy to settle the 261.4 billion shillings ($2 billion) Eurobonds, the principal of which was scheduled to be a one-time payment at the end of the note's term on June 24.

In February, the Central Bank of Kuwait and the National Treasury oversaw a successful buyback of securities worth Sh196 billion ($1.5 billion) by issuing new amortized Eurobonds of the same value.

An amortizing bond is a type in which each payment goes toward interest and principal. In the early stages of a loan, a larger portion of each payment goes toward interest, and in the later stages, a larger percentage goes toward the principal.

A buyback describes the process by which an issuer repurchases its own bonds from investors before the scheduled maturity date.

The repo in February was crucial in allaying fears of a possible sovereign default among Kenya's creditors.

The Treasury had expected to liquidate the remaining portion of the Eurobonds from a mix of government funds and financing from multilateral and bilateral sources, including syndicated bank loans.

In February, the Treasury indicated that it was following a diversified strategy in withdrawing Eurobonds to reduce future interest expenses.

“This diversified financing approach aims to maintain a relatively low weighted average interest rate in the overall public debt portfolio, ensuring Kenya’s debt sustainability in the medium term,” Cabinet Secretary Njuguna Ndongo noted.

Along with the 2024 Eurobond settlement, the new World Bank financing is expected to boost the availability of foreign exchange in the country, leading to greater exchange rate stability.

The Kenyan shilling has risen since its buyback in February, becoming among the world's best-performing currencies this year with an annual return of 16.7 percent year-to-date, after trading at Sh130.71 to the US dollar as of Wednesday.

“Foreign exchange inflows and outflows through the balance of payments will ultimately determine the level of the exchange rate,” Dr. Thug added.

The government appears to be in a race to prevent future concerns over the repayment of other maturing Eurobonds from accumulating, and has targeted a second buyback of the securities this year, setting a target of 130.7 billion shillings ($1 billion).

In addition to the February buyback, the government is expected to buy back bonds worth Sh326.7 billion ($2.5 billion) by the end of 2024.

The buyback is likely to target a recovery of Sh130.7 billion ($1 billion), which matures in February 2028 and includes a one-time milestone payment.

The government has moved to unwind refinancing pressures on Eurobonds with its latest issue involving the redemption of three equal parts of the note maturing in February 2031.

However, Kenya will face relatively higher interest rates in international capital markets if it chooses to issue new Eurobonds as a way to partially offset outstanding bonds.

For example, new eurobonds have a higher coupon of 9.75 percent versus the 6.875 percent coupon on sovereign bonds issued in 2014.

The country's total outstanding Eurobonds are worth 928 billion shillings ($7.1 billion) and have maturities extending until February 2048.

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