Kenya has been planning its first sovereign 10-year dollar-denominated Eurobond since last year and proceeds from this sale had been factored into the 2013/2014 budget.
The urgency around the payments of Sh1.4 billion ($16 million) to Anglo Leasing, which were made after authorisation by President Kenyatta, was surely because the President and his team could see a road crash in the local markets if those markets were called upon to make good the shortfall in the event of a skipped Eurobond.
"The road show will take four or five days, so we could go to the markets this month," Cabinet Secretary for National Treasury Henry Rotich told Bloomberg in Kigali last week.
It's always difficult to unpick cause and effect (and insecurity has been undercutting our asset prices), but you will have noted the shilling closed at a 2.5-years low on May 20 and printed a trade above 88.00 against the dollar last week. However, this time of the year is a period of secular weakness for the shilling as full-year dividends are upstreamed to parent companies.
On balance and subject to security issues staying on the trend line (considerably elevated in 2014), then the shilling should improve from here.
The FTSE NSE 25 Index, which had been on a hot streak in April, posted its worse losing streak in 2014 through last week. You do not have to be a rocket scientist to work out that the blowback on Kenyan assets from a Eurobond miss at this time would have been severe.
Whilst I admire the bravura calls about how we are going to ship in one million Chinese tourists, I can assure that if the asset markets which are hard-nosed were treated to that kind of baloney, the shilling would be going the way of the Ghana cedi, where policy makers have been peddling a narrative no one believes in and each time the narrative gets peddled, the cedi sinks further.
With regard to policy-making and policy utterances, I think selling the Eurobond will have an enormously beneficial impact. We often cite 'sovereignty' as a catch-all phrase and it is worth pointing out that we are ceding a great deal of sovereignty by selling this Eurobond. Essentially, international investors and our bondholders will now have the capacity to price our credit on a real time basis. The cause and effect will be seen on a continuous real time basis. I believe this will over time kick some of the more 'outlier' behaviour into touch.
The issue size of our Eurobond will be not less than $1.5 billion (Sh131.79 billion) and I would err towards trying to sell as much as $2 billion (Sh175.72 billion) worth of Eurobond. The redemption of a syndicated loan of $600 million was kicked three months down the road but evidently, Eurobond proceeds will have to deduct $600 million. A $1.5 billion issue will mean $0.9 billion of net new money. I incline to the view that we need a $2 billion issue - $1.4 billion of net new money.
In the event we unload $2 billion of bonds, then I too can foresee the scenario PS Kamau Thugge outlined to the Business Daily: "When the Eurobond goes through, hard currency worth billions of shillings will have a strengthening impact on the shilling and pull down interest rates. That is the kind of scenario our next fiscal year is based on." Let me finish by trying to answer the $64,000-question, which is what price are we going to have pay for this money? In order to answer this, we have to take a look at other sub-Saharan Africa issuers and those bonds which have a proximate maturity to our proposed issue.
Gabon has a 6? coupon 2024 maturity Eurobond that trades at a spread of 272 basis points above the US Treasury and a yield of 5.29 per cent. Rwanda has a 6? coupon 2023 maturity Eurobond that trades at a spread of 393 basis points over the US Treasury and a yield of 6.3 per cent. Ghana has a 7? coupon 2023 maturity Eurobond that trades at a spread of 638 basis points over the US Treasury and a yield of 8.71 per cent. As you can see, the policy making debacle in Ghana has fed through directly into the cost that it has to pay to borrow money. Ghana has to pay 2.4 per cent more than Rwanda. I surmise that the Republic of Kenya will be satisfied if it can sell at a yield of 6.5 per cent in the event of a small issue size and closer to seven per cent if it goes for a super-sized issue of $2 billion.