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Kenya lines up record $1.5bn bond debut

Kenya is planning sub-Saharan Africa’s biggest debut sovereign  bond issue with a $1.5bnnote, betting that the forthcoming trial of President Uhuru Kenyatta for alleged crimes againsthumanity will not deter foreign investors.

In recent months a string of African countries has issued US dollar-denominated sovereign bonds for the first time at remarkably low interest rates in spite of the risk, as investors flockinto African frontier markets in search of growth.

If Nairobi goes ahead with a maiden $1.5bn sovereign bond, it will be the largest debut insub-Saharan Africa, surpassing Gabon, which set a record in 2007 with a $1bn bond. OtherAfrican countries have issued significantly smaller maiden notes, with Ghana, Nigeria,

Senegal and Zambia opting for $500m-$750m bonds.

Geoffrey Mwau, economic secretary in the Ministry of Finance, told the Financial Times thatKenya was inclined to push for a much larger bond than initially considered. “We think that$1.5bn is [a] good [size],” he said in an interview in the capital Nairobi, adding that the planwas for a 10-year note.

“We are looking at November, but it may spill over to December-January,” he said.

The frontier markets of sub-Saharan Africa have so far weathered the storm that hasovertaken emerging markets such as Brazil, South Africa, Indonesia and India in recentweeks as capital fled the countries in anticipation of the US Federal Reserve beginning to“taper” its bond buying programme.

But the timing is awkward because the country’s appeal to international investors for cash isset to clash with the start of the trial of Kenya’s head of state. Mr Kenyatta faces weeks at atime in the dock of the International Criminal Court in The Hague over accusations hemarshalled and financed ethnic hit squads following 2007’s dis puted elections. More than1,100 people were killed and close to a million homes torched.

The trial of William Ruto, deputy president, also indicted for crimes against humanity, will

start on September 10, while Mr Kenyatta is scheduled to sit from November 12, likely tocoincide with an international roadshow to drum up support for the bond. Both will plead notguilty.

Far from unsettling international investors, Kenya’s economic policy makers argue the casewill prove that Nairobi is a respectful member of the international community, so long as theindicted duo co-operate with the court and attend trial in cases likely to run on for years.

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 Njuguna Ndung’u, governor of the Central Bank of Kenya, said in an interview in Nairobithat attending the trial will “fill” what he said was the west’s perception of Kenya’s“credibility gap”. 

“For me, [the ICC case] is going to enhance the credibility of the Kenyan government and the

Kenyan leaders. We are there integrated with the international community,” he said. “Thiswill be the time to show that we have a credible country, we have credible leaders who arewilling to defend themselves internationally.” 

Kenya on Tuesday recalled lawmakers for an emergency session to discuss a proposal thatthe country withdraw from the ICC. Even if it approves the withdrawal, the case against MrRuto and Mr Kenyatta will go ahead.

 Nairobi first contemplated a eurobond in mid-2007, but delayed its launch several times dueto post-election violence and then the global financial crisis.

The International Monetary Fund, which caps K enya’s total commercial debt at $2.5bn as part of its assistance programme, supports the bond issue and will co-host an investmentconference with the Kenyan government later this month.

Ragnar Gudmundsson, head of the IMF in Kenya, said the main aim of the bond was to“benchmark” Kenya, referring to plans by several state-owned companies to launch corporateinfrastructure bonds subsequently.

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Indian Scenario:

The Indian government hasn't been too eager to bring out such anissue as it could push upits overseas debt and interest burden. Ithas instead tried to focus on deepening domestic markets to meet

its capital needs.In the past, the government neither issued asovereign bond directly, nor did it opt for regular issues. In 1991,India Development Bond was a quasi-sovereign bond, while theResurgent India Bond in 1998 and the Millennium India Deposit in2000 were NRI bonds. All thesewere one-time issuances. Throughthese bonds, banks had raised $1.6 billion, $4.8 billion and$5.5billion, respectively.If you see the Euro zone, they have thisexternal holding of debt. So far, India had the advantage of debtbeing held internally. That advantage will go away and externalholding of debt can create huge stress in the system. It has been

observed in the past that small trigger can create volatility in thebond market.A sovereign bond issuance by India at this time wouldcome with its own consequences. For starters, the timing is notright. In 2000 when Millennium Deposits were raised, Indiahadimport cover of 10 months (against six months at present) andcurrent account deficit was at 0.5 per cent of the GDP (againstFY13's 4.8 per cent). A sovereign bond issuance wouldsmell ofdesperation at this point, which is why the Reserve Bank of India isnot in favour of it.If at all such a bond is considered, the yieldswould have to be higher than the prevailing ratesfor foreign

currency non-resident deposit rate of 4.5 per cent (for five years).If thegovernment hedges this foreign currency risk, then the yields

on these bonds would go up to10 per cent. Also given India'sprecarious macro-economic situation, it's unlikely thatinvestors willbet on the rupee's appreciation in future. Ravi SundarMuthukrishnan of ICICISecurities believes that even though India'sexternal liability situation is comfortable, asignificant increase inexternal debt may call into question India's 'BBB-'rating.

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Sovereign bonds may expose India to poor

credit rating: Analysts

While finance minister P Chidambaram is maintaining that the government is considering alloptions, including the possibility of issuing sovereign bonds, to check the slump, a freshdebate has triggered on its implication for domestic firms raising money from abroad.

Sources have told FE that the government is in no rush to issue its first-ever sovereign bondas it is still evaluating its pros and cons, including the impact on borrowing plans ofcorporates as the sovereign bond price acts a benchmark for borrowing overseas.

Sovereign bonds are debt securities issued by national governments denominated in eitherlocal currency or a global currency, like the US dollar or euro. The bond will be a benchmarkfor companies borrowing abroad in a similar way government security (G-Sec) bonds act as a

floor price for debt raised domestically by companies.

The yield on a 10-year bench mark government security is 8.38% as on September 4. Thiswould mean that any corporate looking to raise money domestically will have to offer areturn higher than the yield on government paper.

Although the government has virtually ruled out sovereign bonds as an option for now withthe RBI strongly advocating against it, markets are still buzzing with a bleak possibility ofsuch a bond being considered. Economic affairs secretary Arvind Mayaram also ruled outsovereign bonds in a conference call with investors recently as it would trigger panic.Analysts believe a sovereign bond might expose India to poor credit rating given its weakfundamentals including high current account deficit and low currency reserves compared toother BRIC countries.

J Moses Harding, market expert from Induslnd bank said, "At a time when most of themeasures announced by the government and RBI have failed to revive markets or arrest thefall in rupee, sovereign bond with weak rating will raise the cost of overseas borrowing forcompanies".