Kenya Pays Eurobond Interest Coupon On Time, Shifts Plan On Loan Buyback

• Kenya was expected to make interest payments for the $2 billion Eurobond debt by December 24
• The bond market responded positively, with the yield on the securities dropping 65 basis points to 13.5% by 4:18 p.m. in Nairobi
• This successful interest payment sets Kenya apart from its neighbour, Ethiopia, which recently failed to meet an interest payment

Elijah Ntongai, a journalist at TUKO.co.ke, leverages more than three years of expertise in financial, business, and technology research, providing insights into both Kenyan and global economic trends.

Kenya has successfully made a timely interest payment on its Eurobonds, triggering a positive response in the bond market, as reported by Danske Bank Asset Management.

The interest payment for the $2 billion debt, issued nearly a decade ago at a rate of 6.875%, was due by December 24.

Impact of the timely payment

According to a report by Bloomberg, the bond market responded positively, with the yield on the securities dropping 65 basis points to 13.5% by 4:18 p.m. in Nairobi, the capital.

This is the lowest since November 23, according to data tracked by Bloomberg.

What does a drop in yields mean?

A bond yield represents the return on investment for an investor, distinct from the bond price, with both having an inverse correlation.

A drop in yields typically indicates increased demand for bonds; therefore, when bond yields decrease, it often implies that investors are willing to accept lower returns on their investments, which could be due to various reasons, such as economic stability, monetary policy, and market expectations.

Eurobond defaulting

This successful interest payment sets Kenya apart from its neighbour, Ethiopia, which recently failed to meet an interest payment.

The recent default by Ethiopia places a spotlight on approximately eight African economies whose debt the International Monetary Fund (IMF) classifies as unsustainable and in need of restructuring.

Fitch Ratings, a leading provider of credit ratings, commentary and research, responded to Ethiopia’s default by downgrading its credit score to restricted default.

"Kenya would like to distance themselves from Ethiopia as a different league," commented Soeren Moerch, a portfolio manager at Danske, which holds the bond.

Loan buyback plan

Despite the positive development in making the interest payment, concerns have arisen regarding Kenya’s original plan to buy back $300 million(KSh 46.4) of a $2 billion (KSh 309.9) Eurobond due June 2024 by December 31, as pledged by President William Ruto’s government.

With just four days left, Moerch suggests that the government’s plan for early redemption is out of question seems to be out of the question now.

While there were no concerns about the coupon, investors have been closely monitoring the bullet payment due in June, particularly given Kenya’s limited foreign exchange reserves.

External funding

The government’s initial plan to redeem the debt before maturity was expected to be funded through borrowing from the pan-African lender Trade and Development Bank (TDB), as revealed by central bank Governor Kamau Thugge earlier this month.

Apart from the TDB loan, Kenya anticipates funding from the International Monetary Fund and the World Bank.

Ethiopia defaults on Eurobond payment.

In other related news on TUKO.co.ke, Ethiopia failed to fulfil a $33 million (KSh 5.1 billion) interest payment on the Eurobond that was due on December 11.

Ethiopia joined a growing cohort of developing countries grappling with Eurobond defaults, such as Zambia, Ghana, and Sri Lanka.

Finance Minister Ahmed Shide conveyed on state television that Ethiopia’s decision to withhold the payment stemmed from its commitment to treat all creditors equally.