Kenya's debt strategy shift: $2 billion Eurobond buyback explained

Kenya recently made a bold move by announcing a buyback of $2 billion Eurobond due in June 2024. This strategic decision caused yields to plunge from 15.79 per cent to 9.96 per cent, leading to a flurry of speculation among investors about the next steps. The aim of this buyback, as stated by Central Bank Governor Kamau Thugge, is to efficiently manage external debt and secure funding for the country. Citigroup and Standard Bank have been appointed as managers for this significant financial maneuver. To shed light on the intricacies of this debt strategy shift, CNBC Africa engaged Johnson Nderi, the Corporate Finance Manager at ABC Capital based in Nairobi, Kenya. Nderi provided valuable insights into the implications of the buyback and the potential outcomes in the economic landscape. According to Nderi, the buyback presents an opportunity for Kenya to capitalize on prevailing market sentiments and circumstances rather than waiting until the bonds mature in June. This proactive approach allows the government to have more control over its financial position and explore current market conditions for better financing options. The bond repurchase offer involves acquiring the bonds at their par value while also settling accrued interest. Nderi highlighted that despite the recent strengthening of the Kenyan shilling against the dollar, there might not be a significant correlation between the two. He attributed the movements in the exchange rate to various factors, with monetary policy playing a substantial role in shaping the currency dynamics. Notably, the Central Bank of Kenya has raised the Cash Reserve Ratio (CBR) by 50 basis points, reflecting a tightening monetary policy stance. Nderi emphasized that this adjustment has positively impacted the exchange rates and overall financial environment. Addressing the uniqueness of this buyback offer, Nderi pointed out that the current tender offer is driven by advisors in the market, along with a proposal for a new bond issuance. The response to these initiatives is eagerly awaited, with expectations of significant market activity by the end of the week. From an investor's perspective, the $2 billion Eurobond buyback presents an intriguing opportunity as the pricing is initially projected to range between 10.5% and 11%. Nderi anticipates a gradual decrease in yields over time, making it an attractive option for risk-tolerant investors. While the size of the Kenyan market may seem substantial locally, it is relatively modest on a global scale, likely drawing participation from various investors. The success of the buyback will hinge on the pricing negotiations and the government's willingness to accept the proposed terms. Nderi expressed confidence in the competence of the advisors overseeing the process, emphasizing their track record in managing similar financial transactions. As the buyback progresses, the focus will be on striking a balance between yield rates and government preferences, determining the path forward for Kenya's debt management and financial stability.