Kenya to Use $2 Billion Eurobond Proceeds as Growth Catalyst

Kenya will use the sale of as much as $2 billion of Eurobonds to upgrade the country’s crumbling infrastructure so it’s able to handle the demands of an expanding economy, Treasury Secretary Henry Rotich said.

The securities will probably have a maturity of 10 years and be sold within the first two weeks of January, Rotich said in an interview on Nov. 7 in the capital, Nairobi. Kenya may pay as much as 8 percent for the planned sovereign debt, which at the maximum amount will match Africa’s biggest foreign-currency issue by South Africa, according to Morten Groth at Jyske Bank A/S and Kevin Daly at Aberdeen Asset Management Plc.

“We have massive infrastructure plans with key transformative projects we need to invest in now to take our growth to a higher level,” Rotich said.

Kenya’s relative stability in a troubled region has led companies including Toyota Motor Corp. and Google Inc. to set up regional bases in Nairobi. While a deadly attack by Islamist militants on a shopping mall in the city in September threatened inflows from tourism and foreign investment, the government has maintained its forecast for economic growth of 5.5 percent to 6 percent this year from 4.6 percent in 2012.

The East African nation, the world’s largest exporter of black tea, targets more than doubling economic growth to 10 percent annually as it strives to create 1 million jobs a year and attain the status of middle-income nation by 2030.

African Eurobonds

Rwanda in April became the first East African nation to sell a Eurobond, raising $400 million of 10-year notes at a rate of 6.92 percent. In July, Nigeria in West Africa sold $500 million of similar-maturity securities at a yield of 6.60 percent.

One of Kenya’s most pressing needs is to find at least $2.1 billion a year to finance an investment gap for infrastructure projects including development of trade-boosting roads and ports and electricity projects that will power businesses, according to the African Development Bank.

After paying off a $600 million syndicated loan obtained by the government last year, the bulk of the remaining Eurobond funds will go toward energy projects including drilling for geothermal steam and expanding the power-transmission network, Rotich said. The government estimates it will take investment of $15 billion to produce an additional 5,500 megawatts by 2017, adding to existing installed capacity of 1,700 megawatts.

The bond proceeds will also help build a standard-gauge railway from Nairobi to the border of neighboring Uganda, and lay roads in the country’s north. Tullow Oil Plc and Africa Oil Corp. are developing the first crude finds in Kenya’s northwest.

Geothermal Development

“We have opened up the geothermal energy sector to the private sector, but we have to take the initial risk of drilling the steam,” Rotich said. Road and rail-link “projects also have a regional dimension, and we are working with our neighbors that are landlocked,” he said.

Kenya expects to sign an agreement for JPMorgan Chase & Co. to be hired as lead arranger for the Eurobond by next week, he said. JPMorgan may decide to seek co-arrangers, he said.

The debt sale is intended to establish benchmark pricing for future international offerings by public and private borrowers, according to the Finance Ministry. ARM Cement Ltd., Kenya’s second-largest maker of the building material, plans to follow the government’s Eurobond issuance with its own sale to help fund a $300 million expansion program. Kenya Power Ltd., the country’s only power distributor, may also offer Eurobonds.

Credit Rating

Kenya’s long-term, foreign currency debt has been assigned a B+ rating by Standard & Poor’s and Fitch Ratings, four levels below investment grade and on par with Cape Verde. It has the equivalent B1 rating from Moody’s Investors Service.

The shilling depreciated for the fourth consecutive day, declining less than 0.1 percent to 85.72 per dollar by 3:10 p.m. Nairobi, paring its advance this year to 0.4 percent, according to data compiled by Bloomberg.

The country wants to change its relationship with the International Monetary Fund, after ending a three-year, $760 million extended credit facility with the lender in January, to recognize Kenya is becoming an emerging market, said Rotich.

“We are reaching a level where the lending facilities at the IMF are no longer suitable for us, because we are to graduate to probably emerging market status,” Rotich said.

“At the same time we are still vulnerable to shocks that affect our economy like oil price shocks, weather vagaries, et cetera, so we want a program or engagement with the IMF that continues to insulate us from any shocks.”

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