Kenya’s plan to buy back at least half of its Sh280.8 billion ($2 billion) debut Eurobond that matures in June next year is expected to ease fiscal pressures resulting from the big-ticket redemption.
The move effectively splits the redemption in half, lessening the burden on the exchequer which would have otherwise been required to make a sizable bullet payment to the sovereign bond investors in one go.
Investors have deemed the planned buyback, which was announced by President William Ruto last week, as part of government liability management to soften the impact brought about by a spike in debt service costs from the expected maturity.
“I want to promise them (investors jittery on Kenya’s ability to make the payment) that we are going to redeem half of it before the end of the year and we will square it out before time lapses next year. We are in a good space,” President Ruto told Bloomberg TV last week.
The early redemption will see the government buy back the bond from investors via secondary trading at a market-determined price which is relative to yield attached to the paper.
While President Ruto did not disclose the means through which Kenya will pay for the early redemptions, analysts reckon the country could tap from its recently replenished foreign exchange reserves.
Kenya’s official foreign exchange reserves rose back above the minimum threshold equivalent to four months of import cover following the recent disbursement of Sh140.4 billion ($1 billion) from the World Bank Development Policy Operations.
The hard currency cover which is partly used to offset outstanding external debt payments has further been firmed up by the receipt of Sh112.3 billion ($800 million) from a syndicated facility with a further Sh14 billion ($100 million) tentatively expected before June 30.
Additionally, fresh disbursements from the IMF in July, which are estimated at Sh57.6 billion ($410 million), are further set to bolster the reserves.
“By the look of things, we are seeing a drawdown of FX reserves to the tune of $1 billion which has been lately boosted by external financing flows and has seen the buffers up to at least $7.5 billion. Another alternative could be the issuance of another Eurobond to refinance this transaction, but this may be feasible only once yields come lower significantly to single digits,” said Churchill Ogutu, an economist at IC Group.
Besides splitting maturities on its debut Eurobond, an early redemption will see Kenya save on part of Sh20.2 billion in interest payments to investors between now and the bond’s maturity.
The buyback will nevertheless come at a premium as bond prices rise while yields on the Kenyan dollar-bonds fall. The debut Eurobond attracts a coupon of 6.875 percent which is paid out semi-annually.
The country would have booked larger savings should it have redeemed part of the bond months earlier when yields in secondary trading peaked.
Investors seem to have gotten wind of the bond buyback before Thursday’s announcement, setting off a further slump in yields and a pick-up in the dollar-bond prices to signal confidence in Kenya’s ability to fully redeem the Eurobond.
“Kenya’s dollar-denominated bond yields have continued to drop at the start of the week as investors mull reports that the country is considering options, including the potential buyback of part of a $2 billion bond due next year. Yields on the notes have declined to levels last seen in March,” Tellimer Insights said in a note published on Wednesday.
