Kenya Eurobond Sale Defies Bombs Driving Up Costs: Africa Credit

Kenya is forging ahead with plans for a debut Eurobond sale, betting a spate of bombings and legal delays won’t deter investors attracted by the East African nation’s growth prospects.

Yields on 10-year shilling debt surged to a record and the currency weakened to a 2 1/2-year low since twin explosions killed at least 12 people in the capital, Nairobi, on May 16. Still, the nation’s bonds have outperformed most emerging-market peers this year, returning 7 percent, sixth-most of 31 developing countries tracked by Bloomberg indexes. In sub-Saharan Africa, only Nigeria performed better, with returns of 8.2 percent.

While the World Bank and African Development Bank have said unrest may deter investors, there is demand for high-yielding African debt, according to Investec Asset Management. Kenya is entering global bond markets after record Africa sales in 2013, including a first time sale by Rwanda and offers by Nigeria and Ghana. Yields on African dollar notes have dropped 74 basis points this year compared with a 67 basis-point decline for emerging markets, according to JPMorgan Chase & Co. indexes.

“The Kenyan specifics are not very positive at the moment, so they may have to pay up,” Vivienne Taberer, a money manager at Investec Asset Management, which oversees the equivalent of $14 billion in fixed-income assets, said by phone from Cape Town yesterday. “We’re seeing inflows into emerging markets generally gaining momentum. If the pricing is attractive we’ll certainly bid.”

Debt Marketing

Kenya, which first considered selling a Eurobond in 1997, may offer $1.5 billion, Treasury Secretary Henry Rotich said in September. The government may market the securities this week after settling court-awarded payments related to a dispute that delayed the offering, Rotich said May 21. Kamau Thugge, principal secretary of the Finance Ministry, didn’t immediately respond to a text message, while calls to Rotich’s mobile phone didn’t connect.

Investors may demand 8 percent to 8.5 percent to buy the debt, according to Fred Moturi, head of fixed-income trading at Sterling Capital Ltd. in Nairobi. Zambia, which shares Kenya’s B1 rating at Moody’s Investors Service, paid 8.5 percent when it sold $1 billion of Eurobonds last month. The yield has since dropped to 7.72 percent.

“Foreign investors’ perception of the security risk will inform the rate, but they will buy,” Moturi said by phone on May 22. “Who knows when the security risk will subside? It is better to proceed than to wait.”

Bomb Blasts

Nairobi was rocked by two attacks this month in which at least 15 people died, while four were killed in two explosions in the port city of Mombasa. Visitor arrivals fell by almost a fifth last year amid bombings including an assault by the Somali Islamist militant group al-Shabaab on the Westgate mall in Nairobi that killed at least 67 people. Tourism is Kenya’s biggest source of foreign exchange after tea exports.

The shilling gained 0.1 percent to 87.86 per dollar by 5:16 p.m. in Nairobi after closing yesterday at its lowest since December 2011, bringing losses this year to 1.8 percent. Yields on government bonds due January 2024 jumped 76 basis points, or 0.76 percentage point, since May 16 to 12.26 percent yesterday, according to data compiled by Bloomberg.

Kenya’s economy is forecast to grow 5.5 percent this year, versus 4.7 percent in 2013, driven partly by shipments of tea and cut flowers and spending on ports and railways. President Uhuru Kenyatta, 52, pledged to boost annual growth to as much as 10 percent in his first term and create one million jobs a year after his election in March last year.

“The situation is still better than what other countries face,” Robert Gatubu, a foreign-exchange dealer at Nairobi-based Bank of Africa Ltd., said by phone on May 22. “Let’s hope it is going to materialize because that is what Kenya has been waiting for and it will be good for the economy,” he said, referring to the bond sale.

Before it's here, it's on the Bloomberg Terminal.