Mall Attack Leaves Kenya Facing Premium on Debt Eurobond

Kenya will probably offer investors a premium to ensure it sells one of Africa’s biggest Eurobonds as the September terrorist attack at Nairobi’s Westgate shopping mall drives up borrowing costs.

The bonds, which at the maximum amount will match the biggest foreign-currency issue in Africa, may yield as much as 8 percent, said Morten Groth at Jyske Bank A/S and Kevin Daly at Aberdeen Asset Management Plc. That compares with yields of 6.60 percent when Nigeria sold $500 million of 10-year notes in July and 6.92 percent on $400 million of similar-maturity securities offered by Rwanda at the end of April.

Kenya needs to spend about $4 billion a year for the next decade to overcome a lack of infrastructure from roads to rail that is holding back economic growth, according to the World Bank. Borrowing costs are rising after the attack on Nairobi’s Westgate Mall on Sept. 21 by the Somali-based al-Shabaab militia, which killed 67 civilians and security personnel.

“In the long-term the attacks are negative,” said Groth, who manages $1.5 billion of emerging-market debt, including Rwandan and Zambian bonds, from Silkeborg, Denmark. “A large issue size and the fact that it’s a debut issuer probably would require a premium.”

The government of East Africa’s biggest economy has said it may sell $1.5 billion to $2 billion of Eurobonds by January. That would be the largest single issuance since South Africa, the continent’s biggest economy, issued $2 billion of 12-year notes in September, matching offerings in 2009 and 2010.

Hire Talks

Kenya is in talks with JPMorgan Chase & Co. to arrange the sale, Treasury Secretary Henry Rotich said in an interview on Oct. 23. The government is also negotiating with Arnold & Porter LLP, based in Washington, to lead counsel.

The world’s largest exporter of black tea will stick to its plan to sell the Eurobond because the attack won’t have “any major impact” on Kenya’s economy, Rotich said. Growth is set to accelerate to 5.6 percent this year, the fastest pace in six years, from 4.6 percent last year, he said on Sept. 24.

Kenya, which first considered a Eurobond issuance in 1997, will use proceeds from the sale to repay a $600 million syndicated loan issued by Citigroup Inc., Standard Bank Group Ltd. and Standard Chartered Plc taken last year. It will also finance the upgrading of rail links between the coastal city of Mombasa, the site of East Africa’s biggest port, and neighboring Uganda and Rwanda, along with power-generation projects.

Two Issues

The government may opt to offer $1 billion in its initial foray into international debt markets and then tap investors with another issuance at a later date, said Guy Tossou, an emerging markets fixed-income money manager at FFTW-BNP Paribas Investment Partners in London.

“Despite the recent tragic events, I don’t think they will have to pay a huge premium, as the yield will largely depend on the global market situation when they decide to sell the bond,” Tossou said in an Oct. 25 interview.

The country has the capacity to borrow as much as $2 billion because its debt levels are low relative to other countries, the International Monetary Fund said in September.

Standard & Poor’s and Fitch Ratings have a B+ rating on Kenyan debt. That’s four levels below investment grade and on a par with Zambia and Cape Verde. It has the equivalent B1 rating from Moody’s Investors Service.

“If they were to offload $1.5 billion or more in this market, they would have to pay up about 7.5 percent to 8 percent for a 10-year maturity,” said Daly, who helps oversee $10 billion in emerging-market assets at Aberdeen, including Tanzanian and Mozambican debt. “It’s possible they could come in lower than that, depending on risk appetite.”

‘Credit Negative’

The attack on the Westgate Mall, the worst since 1998 when al-Qaeda bombed the U.S. Embassy in Nairobi and killed more than 200 people, will dent tourism and is “credit negative” for the nation, Moody’s said on Sept. 26. Tourism accounts for about 12.5 percent of Kenya’s $37 billion economy, the largest source of foreign exchange after tea exports.

The violence will probably reduce tourism revenue by $160 million this year, restricting economic growth to 5 percent, compared with an earlier estimate of 5.6 percent, Charles Robertson, global chief economist at Renaissance Capital in London, said in September.

Yields on 10-year Nigerian debt have dropped 86 basis points, or 0.86 percentage point, since they were sold in July to 5.74 percent as of 1:20 p.m. in London. Rates on Ghana’s securities due August 2023 have climbed eight basis points to 8.08 percent since issuance.

Record Sales

Dollar-bond sales from African governments and companies rose to a record $9.68 billion this year from $6.04 billion in 2012, Megan McDonald, Standard Bank’s head of debt primary markets, said at a conference in Cape Town Oct. 31. Zambia, Angola and Mozambique are among sovereign governments planning Eurobond offers, she said.

“There’s still a lot of liquidity in global markets,” McDonald said. “That money is attracted to Africa not just from a yield and diversification perspective, but also because of the economic-growth story playing out on the continent.”

Yields on African dollar-denominated debt have climbed 131 basis points this year, compared with an average 96 basis-point increase in emerging-market bonds tracked by JPMorgan Chase & Co. as the Federal Reserve considers reducing stimulus that has boosted inflows into developing nations.

The impact of the attack will be offset by Kenya’s economy being the most diversified in East Africa, Daly said. In the longer term, it will benefit from the discovery of oil in the north of the country, he said.

“It’s a good story and we are generally pretty constructive on Kenya,” Daly said. “But it’s down to the fact that it’s a big issue size.”

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