Advertisement

Kenya turns to private bonds, seeks cheaper long-term funds

Saturday July 07 2018
sgr

A cargo train destined for Nairobi is flagged off at the Mombasa terminus of the standard gauge railway on Kenya’s Coast on March 29, 2018. The government has been financing key infrastructure projects through debt. PHOTO | KEVIN ODIT | NMG

By Allan Olingo

Banks may soon be forced back to lending to the mass market if the Treasury’s latest plan to lure fund managers and insurance firms via a private bond placements goes through.

On Friday, Kenya’s Treasury held a meeting with fund managers and insurers, sending its strongest signal that it is considering offering debt through private placement.

This would diversify the country’s debt portfolio and reduce banks’ dependence on government businesses, a fresh move to force local lenders back to the mass market.

As at the end of last month, banking institutions held more than 55 per cent of the $23.7 billion local debt, followed by pension funds at 27.1 per cent, insurance firms at $6.3 per cent, parastatals at 7.1 per cent and other investors at 4.4 per cent.

Late last month, Treasury director of debt policy strategy and risk management Daniel Ndolo wrote to fund managers and insurance firms seeking the meeting.

“The participants will discuss and agree on the schedule of activities towards the issuance of bonds by private placement along with pricing methodology,” Mr Ndolo said in his letter.

Advertisement

Several executives of Kenyan insurance companies met mid-week with the bond placements being a key discussion item before their Friday meeting with Treasury.

Treasury is targeting these private placement investors including mutual funds and pension funds, as they hold private placement assets to diversify their portfolio and improve the risk-return trade-off of their portfolio by securing additional yield.

Alternative source

For these private placement investors, this bond will afford them better returns compared with those investing in comparable publicly-traded securities.

With the government coming calling, it will now afford these institutional investors the ability to negotiate a deal structure that corresponds more to their needs than a structure that involves a large number of investors.

Kenya’s choice of a private placement is said to be driven by Treasury’s push for accessing alternative source of financing away from public bonds and bank loans; and the need to secure long-term fixed-rate funding, which bank loans and public bond do not provide.

Kenya is considering maturities ranging from five to 30 years for its private bonds placement.

“The very private nature of this kind of transactions coupled with Treasury’s ability to access competitive pricing and greater flexibility in structuring the debt issue is what they said made it a good alternative source of financing government projects,” a source with knowledge of the discussions told The EastAfrican.

“These kind of bonds afford the issuer low issuance costs and credit spread and that is what Treasury could be looking for.”

Steepest debt burden

Treasury is seeking to reduce the amount of its debt falling due and the rising roll over debt.

This is common in the domestic debt market, where the government has been increasingly rolling over its Treasury bills, but is only becoming entrenched now in the external debt market which threatens to put the country in a vicious debt cycle.

The country will face its steepest debt burden next year when more than $2.2 billion of both its concessional and non-concessional debt mature. In 2018, the country expects $1.8 billion of its debt to mature.

Kenya will now be banking on its placement agent’s knack to structure and negotiate the terms of this transaction. In the February $2 billion Eurobond, it relied on Citi Bank to structure the bond and sources say that this could be the case with this one too.

On Wednesday, the Central Bank Governor Dr Patrick Njoroge warned that the country had little wiggle room to take in more debt since the government’s multibillion dollar infrastructure projects were not making enough to repay the debts already accumulated.

“As it is, we have less headroom to borrow and we are running out of space. What we need now is more of public-private partnerships and also the build operate and transfer models,” said Dr Njoroge.

The country’s stock of public external debt grew by 19.6 per cent to $25.12 billion as at the end of March 2018, supported by an increase of $2.63 billion in uptake of loans from commercial banks.

As at end of the first quarter of this year, pension firms held $6.4 billion of the government debt while insurance companies held $1.5 billion, data from Central Bank of Kenya shows.

Last week’s CBK weekly report showed that the volume of bonds traded declined further by 22.05 per cent with the turnover declining to 114.2 million last week from $146.6 million the previous week.

Kenya also saw the yields on its five-year and 10-year (2024) Eurobonds reduce, while those on 10-year (2028) and 20-year increased last week.

Kenya’s stock of Treasury bonds, its preferred means of raising money (currently at 63 per cent of its overall debt), has risen to $15.12 billion as at the end of last month from $14.48 billion at the start of the year.

Advertisement