On Monday, Kenya issued its long-awaited debut Eurobond amid heavy demand from fund managers, insurance companies and sovereign wealth funds, despite security concerns after terrorist attacks hit the country on Sunday and Monday evening.
The $2 billion Eurobond – the largest for an Africa sovereign excluding South Africa – spread over two tranches and was over four times oversubscribed, with an order book of $8.8 billion. The five-year, $500 million bond yielded 5.875% and the 10-year $1.5 billion issue yielded 6.875%. Barclays, Standard Bank, JPMorgan and Qatar National Bank were lead managers.
The bond was issued a day after 48 people were killed in the coastal town of Mpeketoni on Sunday evening; further attacks on Monday brought the death toll up to 63. Although al-Shabab, Somalia's al-Qaida-linked terror group, was initially held responsible for the attacks, Kenya's president, Uhuru Kenyatta, claimed on Tuesday that local political networks were to blame for the violence, and that only members of one ethnic group were targeted.
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| John Wright, emerging market syndicate desk, Barclays |
John Wright, emerging market syndicate official at Barclays, says: "The Kenya headlines at the beginning of the week had no effect on the bond. Moreover, the Kenya delegation were upfront in discussing a range of key issues affecting the country during the roadshow, which helped investors understand any potential risks.” Carl Piccolo, head of global syndicate at Standard Bank based in London, who also worked on the deal, says: “Kenya, like other African countries, has problems with terrorism and fundamentalism. For some of them, it’s just par for the course and it doesn't largely affect the running of the country. The events may have an effect on the tourist industry, but not the Eurobond."
According to a note published by frontier market specialists DaMina Advisors, even Kenya's tourism sector will continue to grow because of a number of positive structural factors.
"Supported by a weak currency, well-diversified tourism offerings, slashed taxes on airline tickets, no visa requirements for East African visitors, rising middle-class wealth in Kenya and surrounding East African nations, and an aggressive anti-terror posture by the Kenyatta government, Kenya's tourism industry is set to grow in spite of the recent terrorist attacks," says Patrick Malone, graduate research fellow at DaMina and author of the note.
The risks associated with Eurobond issues in Africa come more from falling commodity prices, volatility as a result of increasing interest rates in developed markets and slower growth in developed markets which has affected African exports, explains Nicholas Samara, vice-president of CEEMEA debt capital markets at Citi.
"Investors are differentiating between countries now and becoming a lot more aware of the fundamentals as opposed to the technicals in Africa and in other emerging markets. In countries such as Ghana and Zambia, fiscal issues and rising debt will have put pressure on the sovereign's ability to borrow. In Gabon, Nigeria and most recently Kenya, strong economic fundamentals create investor appetite," he says.
Cash raised from the issue will go towards repayment on a $600 million syndicated loan due to mature this August as well as various other infrastructure projects. Taking repayment of the loan into account, the Eurobond will add around 3% to the current debt ratio of 52% of GDP. Kenya’s annual debt-servicing costs amount to just over 10% of government revenue.
“The viability of commercial borrowing depends on how effectively the proceeds are used, particularly given the size of the issue and challenges Kenya has had in the past implementing large capital budgets,” says Carmen Altenkirch, director of sovereign ratings at Fitch. “More broadly, debt levels remain sustainable in Kenya. Excluding this issue, public debt stood at 52% in February 2014, but could fall closer to 40% once GDP is revised upwards – just above the B median of 41.5%. Containing budget deficits going forward will be key to continued debt sustainability and maintaining the rating at its current level.”
Kenya is rated B+/Stable and the last rating review by Fitch took place in January.
Kenya is largely insulated from global economic volatility because of strong domestic demand, and its position as East Africa's business and transport hub gives an advantage over peers, says Samara. "Kenya has a well-diversified economy, strong services, telecoms and banking sectors and a growing oil and gas sector. Kenya has solid government debt metrics and the government has managed finances well. It’s an attractive investor destination," he says.
In Kenya, tea, coffee and horticultural products make up close to 40% of exports and tourism is also an important source of foreign exchange. Kenya also receives substantial short-term capital inflows, particularly into its equity market.
Kenya's successful issue is the latest in a wave of African sovereign Eurobonds. Total dollar debt issued by sub-Saharan African sovereigns (excluding South Africa) in 2013 reached $4.3 billion from six issues, according to Dealogic, including a debut from Rwanda at $400 million and Gabon's second offering of $1.5 billion.
According to Dealogic, the total volume of sub-Saharan African sovereign Eurobonds has reached $3 billion, with a $1 billion issue from Zambia accounting for a third of the total volume issued this year. In Africa, Ghana, Senegal and Côte d'Ivoire are all set to issue dollar-denominated debt later this year and debt issuance in emerging markets more broadly is set to continue in spite of announcements by the US Federal Reserve of plans to pull back stimulus measures.
“There has been a notable shift since the tapering-related weakness of late 2013 when there was a distinct risk-off theme in emerging market debt," says Wright. "This year, the perceived risk associated with tapering has more or less disappeared and broader market sentiment around emerging markets has improved. Investors are still searching for yield and the resilient growth and economic potential on the continent keeps drawing them in. The definitive shift we now see is one of size: a year ago, a $2 billion Eurobond out of Africa wouldn't have been possible and we are seeing a lot more interest from mainstream investors.”
But there is a debate surrounding whether or not Kenya paid a premium for issuing the bond nearly a year after the initial run in emerging market debt.
“If Kenya had issued prior to May 2013, when Bernanke spooked the markets by warning of premature tightening in monetary policy, then it would have tapped the international debt markets with a much lower long-term coupon rate than it did earlier this week,” explains Samara.
Zambia serves as an interesting example. “In January of last year, Zambia’s 10-year bond was yielding 4.95%. [This year] they priced a new 10-year bond to yield 8.625%. My view is that Kenya could have locked in a 4% or low-5% handle on their coupon easily had they come early in 2013. Nevertheless, everything is relative and today they printed a very nice trade.”
Wright sees things differently: “We are seeing much stronger demand for emerging market debt at the moment. The Zambia $1 billion 10-year bond priced in early April with a yield of 8.625% and traded at around 7.1% at the time of Kenya pricing so Kenya’s timing was very good. The point on Zambia is that the market overall has improved a lot over the last few months. And investors had no issue with Kenya not coming as soon as it was rumoured.”
Yields both east and west of the Atlantic remain low. Ten-year US Treasury yields are currently trading around 2.64%, down from 3% at the beginning of the year, and the iTraxx Main index, a measurement of how much institutions must pay to borrow money, has hit record lows in recent months.