Kenya, despite missing out on low nominal yields that emerging and frontier markets benefited from at the start of the year, will not be forced to pay a heavy penalty for its upcoming debut Eurobond issue, thanks to familiarity of the credit and pent-up demand for African sovereign issuance, say experts.
“Kenya will be paying more for the Eurobond now than they would have if they issued earlier this year when nominal yields were low, but they won’t be paying a premium for issuing now because the curve for all frontiers has risen,” says Stuart Culverhouse, chief economist and head of research at Exotix.
Kenya is more likely to pay around the 7% to 8% mark, says Culverhouse, in line with other B+ countries and the dispersion in yields of African countries.
Another emerging market (EM) strategist adds: “I would assume Kenya to pay between 7.2% and 7.5% for the issue, depending on what US treasuries get up to.”
For the past couple of years, frontier and EM issuers have profited from excess liquidity as a result of the Federal Reserve’s quantitative easing programme and the lack of high-yield debt instruments in developed markets. However, talks of Fed tapering, and a strengthening dollar, could put pressure on yields to widen.
“The market remains risk-on, as Fed tapering has been postponed as the shutdown in the US put things out of kilter,” says the EM strategist. “Kenya has a window of opportunity now – not as good as what they would have paid if they had issued in April, for instance, but better than what they might have achieved if they had gone to the market in the summer.”
Rwanda, the first country in the East African Community to issue a Eurobond, issued a $400 million 10-year deal at the lowest end of the yield guidance at 6.875% in April – despite the fact the issue was out of range for JPMorgan’s EM bond indices, which could have triggered additional demand from index trackers and encouraged secondary market liquidity.
In July, Nigeria issued a $500 million five-year bond at a yield of 5.375% and a $500 million 10-year bond with a yield of 6.625% – also on the tight end of guidance.
Although appetite for African exposure is not as strong as seen in the spring, benchmark deals during the past year are still trading at tighter levels compared at issue.
Ghana’s Eurobond, due for maturity in 2023, is yielding at 7.8%, compared with 8% at launch, and Zambia’s 2022 bonds are priced at 5.5% versus 5.65% when issued. Nigeria’s 2023 Eurobond is priced lower at 5.5%, compared with 6.625% at issue, but this is, in part, due to its stronger credit rating.
“Kenya is a strong, familiar story and is probably the highest-profile frontier market yet to issue a Eurobond,” says Culverhouse. “Because of this, I don’t think that any changes in perception after the terrorist attack at Westgate would do little to affect pricing either.”
Potential risks
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| Kenya’s finance minister Henry Rotich |
Kenya’s finance minister Henry Rotich is closer than ever to issuing its first Eurobond, with Standard Bank, Barclays and JPMorgan reportedly acting as lead arrangers for a $1.5 billion to $2 billion issue. There are, however, still some pricing risks attached to the bond, warn analysts.
“It’s a big debut,” says Culverhouse. “There could be a question of whether the debt will be too big to service. If this comes into play, they could expect to pay closer to the 8% mark.”
Indeed, factors about debt management could take the price higher, says Culverhouse: Kenya remains vulnerable with smaller FX reserves than its neighbours, and twin current-account and budget deficits.
“Kenya’s track record has shown that it has been able to finance the twin deficit,” says the EM strategist. “So investors can be confident in the issue.
“But the Eurobond will have a wider spread compared to Nigeria, for instance, because of the country’s macro fundamentals. They might have to pay a slight premium because of the deficit, but it won’t be out of control.”
Culverhouse points out: “If Kenya were to issue a $2 billion Eurobond at 8%, around 1% of annual budget revenue would be needed to service the debt. Kenya’s debt interest per annum is about $1.3 billion and the Eurobond, with these metrics, would account for about 12% of this – about $160 million. Debt repayments would be manageable.”
Indeed, timing could also be an issue. “Unless Kenya issues in the first week of December, it might be best for them to wait until the new year,” says Culverhouse. “Issuing during the holidays means that people will be away and demand could be low. They could end up paying a premium for that.”
Senegal, which issued its first $200 million five-year Eurobond in December 2009, paid a premium for issuing during the holidays with a yield of 9.25%. In 2011, Senegal increased the bond’s size to $500 million with a maturity of 10 years.
However, the time to issue before the end of the year is up is closing. “It will take between six and eight weeks for all the documents and the prospectus to be put together,” concludes the EM strategist. “By that time, the market will have shut down. The issue is most likely to happen at the beginning of next year.”