Category Archives: NSE bonds

Kenya Eurobond 2018

Kenya’s National Treasury has just announced a new $2 billion Eurobond which was seven times oversubscribed amid concerns about the country’s debt levels and intrigues about the availability of an IMF financing line.

The official Kenya Government statement reads: The fact that we got $14billion in investor appetite reflected the continued support the country receives. We now have a dollar yield curve stretching out to 30 years, making Kenya one of only a handful of government’s in Africa to achieve this. 

The funds are earmarked for development initiatives, liquidity management, and ambitious infrastructure programs. It goes further to add that the Eurobond issue will be listed on the London Stock Exchange and that the joint Mandated arrangers were Citi, J.P. Morgan, Standard Bank, and Standard Chartered Bank.

There was little awareness about the bond, no prospectus was publicly released, and there was no indication on which investors the Eurobond was being pitched to, but it appears that the successful issue will be dated February 28, 2018. 

The Eurobond breakdown is for a mix of two equal halves of 10-year and 30-year bonds, priced at 7.25% and 8.25% respectively.

The announcement comes after some potentially embarrassing news reports that the International Monetary Fund had cut off a line of funding, a statement which was later retracted, and others that Moody’s had downgraded Kenya’s ratings, a claim which the government also disputed.

But the ratings cut, and the mysterious IMF news (and retraction) did not appear to have an impact on the pitch to investors.

This is the second Eurobond after another set of bond issues in 2014.
$1 = Kshs 101.4

Barclays launches the Africa Financial Markets Index 

Barclays launched their first edition of the African Financial Markets Index (AFMI) that ranks and compares the depth of financial markets in seventeen African countries. The countries were score against six broad pillars of (1) Financial markets depth, (2) Access to foreign exchange,  (3) Market transparency & the regulatory environment, (4) Macroeconomic opportunity, (5) Enforceability of agreements and (6) Capacity of local investors.

South Africa came out on top of the AFMI with 92 out of 100. It was classified as a highly developed market but (with a) challenging macroeconomic outlook; It was followed distantly by Mauritius (66), Botswana (65) and Namibia (62).

Kenya was ranked fifth (59), just ahead of Nigeria (53) Ghana (49) and Rwanda (48), and Kenya was found to be the most sophisticated in East Africa due to innovations and reforms by the Nairobi Securities Exchange (NSE) and the Capital Markets Authority (CMA).  Kenya’s scores were quite consistent across the six pillars with recent developments including the de-mutualization and the IPO of the NSE, the launch of a first exchange-traded fund by Barclays Kenya, and the launch of the M-Akiba bond.

Kenya is the seventh largest stock exchange by market capitalization and sixth by bond listings. But George Asante, Managing Director and Head of Markets at Barclays Africa said that Kenya lacked deep-pocketed market-makers who could broker deals, and take price risks and also that Kenya needed to develop a primary dealership network. He added that the participation of local investors in long long-term investing was quite limited and local investors are critical as they buffer volatility caused by foreign investors. Assets were concentrated among buy-and-hold investors, rather than pension funds and insurers. Kenya’s domestic institutional investors have $12.6 billion of assets but this only works out to  $173 per capita and he suggested that Kenyan markets and regulators needed come up with more securities listings, instruments, and innovations.

Barclays Bank of Kenya Managing Director Jeremy Awori said that “The AFMI will be produced annually to drive conversations, track progress and address gaps in financial markets.” Already countries like Rwanda and Morocco want to use the index data to improve their financial markets.  At the tail end of the AFMI was Egypt, Mozambique, Seychelles and Ethiopia. Ethiopia was scored as “a fast-growing economy but with no financial markets depth or local investor capacity.”  

Guests at the launch included Jeffrey Odundo, CEO of the NSE, and Paul Muthaura, CEO of Kenya’s CMA. Muthaura said the CMA had a master plan to make Kenya a choice destination for capital flows by 2023, while Odundo said the NSE has broadened its  revenue and product base (by introducing REIT’s, ETF’s, M-Akiba and next derivatives, and a new law to govern securities lending), and was working to make Kenya more visible. They are active members of the Africa Securities Exchange Association and will host a “Building African Financial Markets” seminar in Nairobi in April 2018. They also plan to join the World Federation of Exchanges.

The AFMI report can be downloaded here from the Official Monetary and Financial Institutions Forum website; OMFIF produced the report with Barclays Africa. 

Moody’s places Kenya’s B1 rating on review for downgrade

Moody’s Investors Service has placed the B1 long-term issuer rating of the government of Kenya on review for downgrade.

 

Excerpts

The decision to place the rating on review for downgrade was prompted by the following key drivers:

  •  Persistent, large, primary deficits and high borrowing costs continue to drive government indebtedness higher
  • Government liquidity pressures risk rising in the face of increasingly large financing needs
  • Uncertainties weigh over the future direction of economic and fiscal policy, in part due to evolving political dynamics

Moody’s expects that Kenya’s government debt burden, which has risen to 56.4% of GDP in June 2017, up from 40.5% five years ago, will continue to rise due to persistently high primary deficits and borrowing costs. Pressures on the government primary balance, which posted a deficit of 5.3% of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60% mark by June 2018.

Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated. In the latest fiscal year, the government spent 19.0% of its revenues on interest payments, up from 10.7% five years ago.

A key focus of the review will be to assess the capacity and willingness of the government to address these budgetary challenges in a comprehensive, effective and timely manner.

What Next?

Moody’s would downgrade the rating if the review were to conclude that Kenya’s government debt and financing needs, and hence its fiscal strength and liquidity position, have eroded to levels no longer consistent with B1 rated peers. In particular, the rating agency would downgrade the rating in the absence of an effective policy response to these challenges.

Or

Moody’s would confirm the rating at B1 if the review were to conclude that the policy response offers the prospect for tempering the currently-anticipated upward trend in government debt and that liquidity risks are being effectively managed.

Moody’s Debt Summit Nairobi

Moody’s 4th annual East Africa investor summit Kenya, held in association with Rich Management, looked at East Africa’s resilience in Sub-Saharan Africa’s low growth environment.

Excerpts

Economic growth:

  • Kenya and Nigeria summit audience think political risks are main challenge to credit in emerging markets. Dubai summit ones are watching USA (policies under Trump and China (economic slowdown) events
  • Between 2007-15, 6 of 10 fastest growing African economies were commodity exporters, but for 2016-18, 5 of fastest growing ones are in East Africa. While Sub-Saharan Africa growth is at a 20-year low, East Africa is attractive as their growth is not about commodities.
  • Kenya’s economy growing due to infrastructure, FDI, population but banks not benefiting, partly due to the interest rate cap.
  • Investors in Kenya want to see a benign August 8 election with a first round winner and a gracious loser.

Bank’s and interest rate:

  • Banks face a dilemma – on whether to lend to companies in the Kenya economy or to the Kenya government (where they can earn 10% per year short-term, or 14% in the long-term).
  • There was already a slowdown in bank lending (due to regulation and NPA’s) before the interest rate caps.
  • The Cost of borrowing in Kenya was too high; and even after interest rate caps, large banks are still getting good 20% returns on equity.
  • Some firms are opportunistically raising debt – locking in cheap funding ahead of the election e.g. East African Breweries announced they would build a brewery at Kisumu even as they are yet to agree on the financing. But the problems at Nakumatt are probably due to the drying up of their credit lines as banks feel 14% lending does not compensate their risk.
  • At Moody’s, they rate three large Kenya banks – Coop Bank, Equity Bank and KCB Group all equally. Equity has 55% SME exposure and KCB is big in property, while Coop is well-balanced between business and consumer lending – but they have all taken steps to mitigate risks from the interest rate cap law.

Africa Debt markets

  • While Moody’s recently upgraded Senegal and Ivory Coast and stabilized Ghana, 8 of 19 Sub-Saharan Africa economics are still rated negative.
  • South Africa preempts state corporation defaults through bailouts – e.g. at Eskom, SAA – but this doesn’t inspire business confidence.
  • East Africa economies have solid reserves (4-5 months of imports) but key risks are fiscal deficits and debt accumulation (50% debt to GDP is a warning point).
  • One of the best performing Eurobonds in Mozambique defaulted.. a flood of money can ignore fundamentals

Kenya’s Debt

  • Kenya has a history of debt going back over the last ten years.. it knows how to live with the debt. Currently 15 to 17% of Kenya’s income goes to pay debt – (Moody’s get data from government budgets or IMF)
  • The London Stock Exchange, and some European ones, are considering issuing some debt in Kenya shillings.
  • Kenya can do better in terms of exports & revenue e.g. by improving productivity – the government explained this to the IMF.

M-Akiba Reloaded: More government bonds via phone

On Friday the Treasury Cabinet Secretary launched the second tranche of M-Akiba, the government bonds that can be bought and traded via mobile phone. 

The first tranche of M-Akiba, worth Kshs 150 million was launched in March 2017, and marked at 10%, maturing in April 2020. They had their highest trading day on May 12 when about Kshs 345,000 was traded; usually, about Kshs 100,000 per day ($1,000) of M-Akiba are traded by investors so far. At the time of launch, the indication was that another Kshs 4.85 billion was to be raised in June 2017.

The new M-Akiba infrastructure bond issue (MAB2/2017/3) is targeting Kshs 1 billion (~$9.7 million), with a green shoe option to raise another Kshs 3.85 billion. These are also three-year infrastructure bonds (dated 24 July), paying 10% per annum, with interest paid every six months, and the minimum investment is, again, Kshs 3,000 (~$29). Payments for the new bonds will be done on mobile money such as M-pesa (by dialing *889#) as well as through Pesalink – a new service from Kenya banks that allows their customers to make payments via phone and mobile money transfers of up to Kshs 1 million  (~$9,700) per day – which is seven times greater than what they can do with mobile money, under current banking rules (set to prevent money-laundering). The deadline for investors to apply for the M-Akiba bond is July 21, and the trading commission for will be 0.1% of allocations.

EDIT (July 23 Nation): MAB2/2017/3 has been extended to 8th September and the bond will start trading on 12th September. It has been reported that investors bought Kshs 128 million before the initial deadline, and the newspaper notice of the extension mentions that these invests will be paid for interest earned between July 24 and 11th September.

EDIT February 22, 2019: A new tranche of M-Akiba bonds will be on sale from February 25 to March 8, 2019, with the Treasury targeting to raise Kshs 250 million by offering investors 10% interest. The bond targets investors who can put in as low as Sh3,000 via their mobile phones then lock it in for a period of three years. They then earn interest after every six months and principal amount upon reaching maturity date. Those wishing to exit early can do so through Nairobi Securities Exchange where the bond will trade on the secondary market. 

‘Akiba’ means ‘savings’ in Swahili.
$1 = Ksh 103