Eurobond debut in Kenya

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Setting a new record for a maiden sovereign issuance in Africa, Kenya successfully tapped the Eurobond markets for the first time in June, selling $2bn worth at better-than-expected rates.

The country, which had planned for this issuance for more than six years, originally sought to raise $1.5bn, but when bids totalled $8bn, the National Treasury ended up issuing two tranches: a five-year note with a yield of 5.875%, and a 10-year one at 6.875%.

Kenya has earmarked about $600m of the funds to repay an existing debt, while the rest will help defray the cost of an ambitious capital spending programme, including components of the government’s development plan Vision 2030, focused on transport, power and other infrastructure.  

Issuance expectations

The success of the bond came as a pleasant surprise, given both the challenging exogenous pressures and a spate of attacks from Somali militants that heightened security concerns. The country’s sovereign ratings also fell below investment grade (“B+” from Standard & Poor’s [S&P]) but even so failed to dampen international interest.

Regional markets have benefited from robust enthusiasm for African sovereign debt. The expectation seemed reasonable given the flood of investment dollars looking for yield in the frontier markets of sub-Saharan Africa: Rwanda issued debt at 6.9% in April 2013, followed by Nigeria at 6.6% in early July 2013. As of mid-year last year, sub-Saharan countries excluding South Africa had announced plans to place $7bn of bonds, more than in the past five years combined.

However, as a result of the tapering of quantitative easing in the US, which would have otherwise been expected to lessen the attraction of emerging market debt, alongside weakening fiscal indicators in Kenya – which is grappling with a deficit and challenges related to devolution – analysts had predicted an average rate of 8% or higher.

Plans for the issue predate the 2008-09 global financial crisis times, which imposed a lengthy delay on the debut bond. While rates have stayed very low for much of the time since then, credit markets have remained tight, particularly as regards emerging markets. The Treasury was reportedly determined to make a positive impression with its first Eurobond, so it passed up earlier opportunities at potentially lower rates until it was certain of at least full subscription.  

Infrastructure drive

The funds from the issuance will go a long way in helping boost momentum for the government’s capital spending campaign. A number of capital projects have been unveiled that look set not only to reinforce domestic growth but also to improve regional integration, including the Lamu Port and Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) Corridor development which represents Kenya’s largest-ever infrastructure undertaking.

The project aims to reduce dependence on existing road networks through the creation of a second transport corridor, as well as a new hydrocarbon export channel for Kenya, South Sudan, Uganda and Ethiopia, while enhancing connectivity between Lamu, Isiolo, Juba, and Addis Ababa. The plan was originally conceived in 1975, but held back for years due to financial and political constraints.

The LAPSSET Development Authority was established in April 2013 and tasked with managing the project, which is expected to cost up to KSH2.5tr ($28.4bn). The government is expected to contribute 16% of its annual budget when construction ramps up, although the project is in turn expected to add 3% to the country’s GDP by 2020. The government is set to break ground for the construction of the first three berths as the Lamu Port.

The increased focus on transportation development has also been supported by increasing government expenditure; according to the government’s 2014/15 budget policy statement, the Ministry of Transport and Infrastructure will receive KSH154.56bn ($1.76bn) in the 2014/15 budget, a 23.6% increase over the 2013/14 budget of KSH125bn ($1.42bn.) Total transport spending is expected to reach KSH250.05bn ($2.85bn) in 2014/15, a 17% increase over KSH213.72bn ($2.43bn) in 2013/14, and representing 22.5% of total programme spending.

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