Understanding Eurobond in Kenya's Debt Market

In Kenya's debt market, a eurobond is a type of bond issued by the government or a corporation in a foreign currency, typically the US dollar.

Eurobonds are denominated in a foreign currency and are issued in the international market, allowing the issuer to raise funds at a lower cost compared to local currency bonds.

Kenya's first eurobond issue was in 2014, raising $2 billion to finance infrastructure projects.

This move marked a significant shift in Kenya's debt strategy, as it began to tap into the international bond market to raise funds.

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Kenya's debt market is a significant player in the region, and the recent eurobond issue is a testament to this. Kenya raised over $2.1 billion with a dual-tranche eurobond.

The eurobond consists of two portions: one $900 million portion with seven-year bonds priced at 7 percent, and the other $1.2 billion portion with 12-year bonds priced at 8 percent. Both portions were priced below the initial estimated market price.

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Investors were more focused on the credibility of debt issues out of Kenya, and they weren't too worried about the country's debt situation. The bond offering was oversubscribed by over four times.

However, concerns remain around Kenya's rising public debt as a percentage of GDP, which increased to 55 percent from 42 percent when Kenyatta took office in 2017.

Kenya's financial challenges are a significant concern for the country's economic growth. The public debt has been rising steadily, reaching KES 6.2 trillion in 2020, which is approximately 58.5% of the country's GDP.

High interest rates have been a major issue in Kenya, with the average interest rate on government securities exceeding 10% in 2020. This has made borrowing expensive for both the government and the private sector.

Kenya's financial sector is heavily reliant on foreign capital, with the country's foreign exchange reserves dwindling to just 3.5 months of import cover in 2020. This makes the country vulnerable to external shocks.

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The government has been struggling to meet its budget deficit, which stood at 7.2% of GDP in 2020, one of the highest in the region. This has put pressure on the government to increase taxes or cut expenditure, which can have negative effects on the economy.

Kenya's financial challenges are exacerbated by a weak tax base, with the country's tax-to-GDP ratio being one of the lowest in the region. This makes it difficult for the government to generate revenue to fund its development projects.

The country's financial sector is also plagued by corruption, with the government losing billions of shillings to corruption and mismanagement every year. This has eroded trust in the financial system and discouraged investors.

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A debt issuance strategy is crucial for companies looking to raise capital through eurobonds in Kenya.

The strategy typically involves determining the optimal bond size, with issuers often seeking to raise between KES 5 billion and KES 20 billion.

This range allows companies to tap into the vast liquidity available in the eurobond market while minimizing funding costs.

Kenyan companies have successfully issued eurobonds in various currencies, including US dollars, euros, and yen.

The choice of currency depends on market conditions and the issuer's funding requirements, as seen in the case of Kenyatta University's 2018 eurobond issue.

In terms of tenor, eurobonds in Kenya can have maturities ranging from 5 to 10 years, with some issues having even longer tenors.

This flexibility allows issuers to tailor their debt issuance strategy to their specific needs and risk profiles.

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Kenya's Financial Situation is a bit of a mixed bag. The country has a relatively high GDP per capita of $1,936, which is higher than many other African countries. However, Kenya's economy is still heavily reliant on remittances from abroad, which account for around 3.6% of the country's GDP.