Eurobond yields defy Moody’s downgrade
Tuesday May 23 2023
Kenyan Eurobond yields have eased significantly since peaking earlier this month despite an adverse credit downgrade by Moody’s Investor Service.
The ease in yields implies the country could access external financing at more favourable costs if it is to return to the international capital markets.
Data from the Central Bank of Kenya (CBK) shows yields on Kenyan Eurobonds have taken a steady downward trajectory with rates on the 10-year Eurobond maturing next June, for instance, easing by 5.5 percentage points in just two weeks.
Read: Treasury shops for lead manager for new Eurobond
The paper which represents Kenya’s debut Eurobond, for instance, had a yield of 15.371 percent as of May 18 compared to 20.895 percent on May 2.
Yields on other Eurobonds have followed a similar trajectory with the seven-year, 10-year (maturing in 2028), 12-year, 13-year and 30-year all falling by 1.972, 2.171, 1.198, 1.304 and 1.155 percentage points respectively.
Despite Moody’s downgrade of the country’s foreign currency issuer ratings from B2 to B3 on May 12, analysts reckon the recent International Monetary Fund (IMF) affirmation of the country’s fiscal and monetary standing has eased jitters among Kenyan Eurobond investors resulting in the yields decline.
“IMF’s thumbs up saying that it has confidence in Kenya has given confidence to the investor community. The yield curve in the last few weeks mirrors the bump in investor confidence,” Wesley Manambo, a research analyst at Genghis Capital said.
Analysts at AIB-AXYS Africa expect the declining trend on Kenyan Eurobond yields to continue, boosted in part by the rebound in domestic government securities issuances.
May’s primary bond sale was, for instance, the first fully subscribed government bond outside the infrastructure bond from which investor bids totalled Sh20.74 billion against a target of Sh20 billion.
The bond’s tap sale last week meanwhile saw offers of Sh10.603 billion against a target of Sh10 billion, boosting the government’s revenue mobilisation efforts via local borrowing.
“In the international market, yields on Kenya’s Eurobonds decreased by an average of 83 basis points indicating improved investor sentiment on the long end. We observed the 2024 Eurobond paper decreased by 218 basis points, highlighting the paper’s sensitivity to market sentiments given that its maturity is less than 13 months away,” the analysts stated.
In downgrading Kenya’s credit rating, Moody’s cited rising liquidity risk for the government following the deterioration of domestic funding conditions.
This followed notable under subscriptions of bond issuances in the opening half of the year that included a rare bond cancellation on low investor appetite.
The missed subscriptions left receipts from domestic borrowing at Sh406.6 billion against a target of Sh886.5 billion at the end of June including redemptions and rollovers.
Despite concerns about domestic financing underperformance, the IMF expressed confidence in Kenya’s ability to navigate both the domestic and external shocks in comments that were seen as a shot in the arm of the country’s authorities.
“We know that as a result of Covid and the war in Ukraine, inflation shot up, interest rates jumped and countries like Kenya found themselves innocent bystanders hit by those shocks. For Kenya, what it meant was no access to international markets for now and for pressure to withstand the funding squeeze that has come as a result,” IMF managing director Kristalina Georgieva told the Business Daily.
“We have a very strong programme with Kenya, we are financing now and we intend to expand by deploying a new long-term concession financing instrument we have created resilience and sustainability.”
Read: How Kenya will fund Sh256bn Eurobond settlement next year
The IMF is set to complete a staff visit in the country this week in a tour covering the fifth review of Kenya’s Sh322.2 billion ($2.34 billion) programme after which additional disbursements will be made next month.
The review will also consider Kenya’s application to IMF’s resilience and sustainability trust (RST), a sustainable financing programme under which Kenya could access an additional Sh137.7 billion ($1 billion).
Meanwhile, the World Bank Group executive board is set to approve Sh137.7 billion ($1 billion) in funding to Kenya via its development policy operations this Friday.