Kenya Eurobond 2018 A to Z (Part II)

Excerpts from reading the prospectus for Kenya’s 2018 Eurobond issues totaling $2 billion (~Kshs 202 billion). 

Advisors:  joint lead managers were Citigroup Global Markets, J.P. Morgan Securities, Standard Bank of South Africa and Standard Chartered Bank. The fiscal/paying agent was Citibank (London), Registrar was Citigroup Global Markets (Deutschland), legal advisors were White & Case LLP and Allen & Overy LLP (English and US law), and Coulson Harney LLP and Kaplan & Stratton Advocates (Kenya Law) and the listing agent was Arthur Cox (Dublin).

Citigroup, J.P. Morgan Securities, Standard Bank of South Africa and Standard Chartered Bank each committed to subscribe for $250 million of the 2028 and $250 million of the 2048 bond issues

Codes: for the 2028 Notes: 491798 AG9 / US491798AG90 / 178426192 XS1781710543 / 178171054 and for the 2048 Notes: 491798 AH7 / US491798AH73 / 178426478 XS1781710626 / 178171062

Debt Rescheduling: Kenya has approached the Paris Club three times to seek debt relief and rescheduling; in January 1994 for $535 million, in November 2000 over $301 million and in January 2004 over $353 million. Also to the London Club 1998 over $70 million and in 2003 over $23 million.

Default (defined as): Failure to pay 15 days after due date, or issuer (Kenya government) ceases to be a member of the IMF.

Denomination: The Notes are issued in registered form in denominations of US$200,000 and integral multiples of US$1,000.

Disclosure: The Issuer will publish all notices and other matters required to be published (regarding Condition 14, 10, 13: on the website of the National Treasury.

Finance Management: Kenya’s law provides that: over the medium term, a minimum of 30% of the national budget shall be allocated to development expenditure and the national government’s expenditure on wages and benefits for its public officers must not exceed 35%  per cent. of total national government revenue and over the medium term, the national government’s borrowings should be used only for the purpose of financing development expenditure and not for recurrent expenditure. .

IMF: The second and third reviews of the IMF programme due in June 2017 and December 2017 could not be completed on time due to the prolonged election period. Accordingly, no funds under the SBA-SCF 2 facility are available to Kenya until it has reached certain targets to the satisfaction of the IMF, which will be assessed at the next review. But, even if the IMF agrees to make this or another programme available upon conclusion of their review, the government intends to continue to treat the arrangements as precautionary and does not intend to draw on the facility unless exogenous shocks lead to an actual balance of payments need.

Income tax (enhancement of): A review of the Income Tax Act is ongoing and is targeted to be completed by mid-2018. In an effort to boost domestic revenue mobilisation, the government is undertaking reforms to bolster revenue yields  including roll out of the integrated customs management system, implementation of the regional electronic cargo tracking (RECTS) to tackle transit diversion; data matching and use of third-party data to enhance compliance, integration of iTax with IFMIS to ensure timely collection of withholding VAT and other withholding taxes; expansion of tax base by targeting the informal sector, betting, lotteries and gaming; pursuit non-filers and increased focus on taxation of international transactions and transfer pricing and enhance investigations and intelligence capacity to support revenue collection.

Informal economy: A significant portion of the Kenyan economy is not recorded and is only partially taxed, resulting in a lack of revenue for the government, ineffective regulation, unreliability of statistical information (including the understatement of GDP and the contribution to GDP of various sectors) and inability to monitor or otherwise regulate a large portion of the economy.

Interest Rates: The yield of the 2028 Notes is 7.25% and the yield of the 2048 Notes is 8.25% in each case on an annual basis. The yields were calculated at the issue date.

Listing: The Eurobond Notes will not be issued, offered or sold in Kenya, and the notes may not be offered or sold in the United States. Applications have been made to the Irish Stock Exchange at a cost of 5,500 euros and the London Stock Exchange for GBP 4,200.

Litigation:  The Issuer has appointed the High Commissioner of the Republic of Kenya in London, presently located at 45 Portland Place, London W1B 1AS as its agent for service of process in relation to any proceedings (“Proceedings”) before the English courts permitted by

Indebtedness:  Total national government debt stood at US$41.2 billion as at 30 June 2017, representing a 17% increase from June 2016. The government is permitted under the terms of the PFMA to incur debt within the limits set by Parliament, currently set at 50% of GDP in net present value terms. Following the issue of the (Eurobond) Notes, the total net present value of debt as a percentage of GDP is expected to nearly reach the 50% limit. Although the government may be restricted from incurring further public debt under such circumstances, the Government will be seeking to refinance or repay near-term maturities, and therefore expects to maintain the ratios within the set limits.

Total multilateral debt increased by 15.8% to stand at US $8.0 billion at 30 June 2016 while total bilateral debt increased to US $5.3 billion at 30 June 2016, mainly driven by a rise in stock of debt from the People’s Republic of China, which increased by 21.2%. Also, as at 30 June 2017, the national government guaranteed approximately KES135.1 billion of the indebtedness of the non-financial public sector include Kshs 77 billion to Kenya Airways last year.

Purpose Kenya expects the net proceeds of the issue of the Eurobond Notes, before expenses, to amount to approximately US$1,999,600,000 which it intends to use for financing development expenditures and to refinance part of its obligations outstanding under certain syndicated loan agreements. According to the “Plan of Distribution”, Kenya syndicated loans of from October 2015 (debt now $646 million) and March 2017 ($1 billion)  and proceed from the new February 2018 issue will be used to pay all of the 2015 loan and part of the 2017 loan and  to “manage the maturity profile of the government’s debt.”

Repayments: (for both issues) payable semi-annually in arrears on 28 February and 28 August in each year commencing on 28 August 2018. The Eurobond Notes are not redeemable prior to maturity.

Withholding Taxes: All payments in respect of the Eurobond Notes by or on behalf of the Issuer shall be made without withholding or deduction of any present or future taxes,

See Part I about the 2014 Eurobond issue. 

1USD  = Kshs 101, 1 GBP = Kshs  139, 1 Euro = Kshs 123

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