The National Treasury has abandoned its intention to reschedule the payment of Eurobond loans, last week’s announcement spooked investors.
The Treasury yesterday canceled an earlier announcement seeking the services of a ‘sovereign debt advisory firm’, which gave the impression that all types of commercial loans, including Eurobond loans, would be restructured.
This shook the market as investors feared there would be a delay in paying their loans, as happened with Zambia. The Treasury was forced to specify that only syndicated loans granted by commercial banks would be restructured. In the new International Expression of Interest, the Treasury instead talked about appointing a “Liability Management Operations Consulting Firm.”
“Debts held in international sovereign bonds are excluded,” the notice read.
The analysts, who spoke to The Standard on condition of anonymity for fear of reprisal, said most investors could have interpreted the publicity as a possible refinancing signal on the charts.
“And until they get better messages about the specific plans, investors always assume the worst first and the best second,” said one of the analysts.
As part of his Economic recovery post Covid-19 strategy released in November last year, the National Treasury intends to prepare a debt restructuring strategy covering commercial and bilateral creditors.
The restructuring, according to the Treasury, aims to lower the cost of debt by lowering its interest rate, reducing refinancing risk and freeing up cash to be used for other essential public services such as health care.
The strategy will be to identify potential debt in the portfolio that needs to be structured and negotiated with potential creditors and lenders.
“The Government of Kenya has in the past conducted liability management operations on its local currency debt aimed at improving the maturity profile of the debt and aims to extend the same to a number of external syndicated credit facilities “, Treasury said in the revised newspaper announcement.
However, the analyst we spoke to noted that loans and local issuance are a whole different matter and without reputational risk.
Analysts say reprofiling (time-stretching) or restructuring (payment-stretching) on capital market issues is easy to talk about but hideous to do. “The ripple effects of such changes can affect the sovereign, but also the borrowing of local companies, project financiers doing infrastructure,” said another expert, also on condition of anonymity.
Last year, Zambia opted out of a 5 billion shillings ($42.5 million) Eurobond redemption, becoming the first African country to default on its debt to the Covid-19 era. The Treasury is preparing for the fourth Eurobond with Kenya authorized to borrow up to 780 billion shillings on the international financial markets under the three-year program it has with the International Monetary Fund (IMF).
Treasury Cabinet Secretary Ukur Yatani (pictured) initially expressed doubts about such expensive loans.
Much of this money will be used to refinance maturing loans. The Treasury said the successful consultancy will provide liability management advisory services to the state through the national treasury – aimed at restructuring costly external debt.
This will help reduce their interest and the risk of default. Bidders must have five years of experience providing sovereign debt advisory services in weak and emerging economies.
It is also intended to give Kenya a break from paying down its debts, which has so far benefited from a debt service suspension initiative under the G-20 countries. The six-month repayment holiday has reduced debt service by around $640 million (Sh69.1 billion) in 2021. But some critics have argued that this is only a a painkiller, noting that Kenya needed to undertake serious debt restructuring. Under the program with the IMF, the Treasury will be allowed to issue Eurobonds of up to 508 billion shillings, which will be used to refinance maturing loans.
Because Kenya does not have enough foreign exchange reserves to repay all of its external borrowings, most of which are denominated in dollars, it has to borrow to repay some of the borrowings.