Kenya could spend more than 80 per cent — $1.6 billion — of the proceeds of its $2 billion Eurobond issued three weeks ago to retire syndicated loans contracted in the past two years.
This puts the country in a vicious cycle of rolling over external debt by using new loans to retire maturing ones.
According to the prospectus used to secure the latest sovereign loan, Kenya told investors that the agreements on two syndicated loans taken out in 2015 and 2017 had clauses that allowed the lenders to call in their money early should Nairobi issue a bond on the international market.
According to the prospectus, Kenya on October 28, 2015 and March 9, 2017, took out two syndicated loans of $750 million and $1 billion respectively, from a consortium of lenders comprising Citibank, Standard Bank of South Africa and Standard Chartered Bank.
The loans have stated maturities of April 27, 2018 and April 18, 2019 respectively were meant to finance the development budget.
As of February 2, 2018, when the prospectus was drafted, Kenya’s outstanding debt for the 2015 syndicated loan was $646 million and $1 billion for the 2017 facility.
Under the terms of the 2015 facility, the outstanding amount was to be redeemed at the earliest date of a bond issue by Kenya, or at the maturity date.
The 2017 syndicated loan has a similar redemption feature, but the lenders have the discretion to waive this prepayment demand following an issue of a new bond by Kenya.
“Kenya expects certain lenders to exercise this feature and that they may not require, or may only require part repayment of the 2017 syndicated loan facility,” the National Treasury said in the document.
“Accordingly, Kenya expects that part of the proceeds of the Notes (Eurobond) will be applied to repay all amounts outstanding under the 2015 loan facility and that part of the proceeds may be applied to repay a portion of the amount outstanding under the 2017 syndicated loans and manage the maturity profile of the government’s debt.”
The disclosure that the Eurobond II funds will be used to pay the 2015 loan, however, raises questions on what the government intends to do with the proceeds of another facility taken out in 2017 to refinance this very debt.