RPT-Fitch: Kenya Loan Extension Shows Risks of Non-Concessional Debt

Thu May 15, 2014 6:59am EDT

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May 15 (Reuters) - (The following statement was released by the rating agency)

The decision by the Kenyan government to extend the term of a maturing syndicated loan highlights the refinancing risk that some African countries face as they take on increased amounts of non-concessional market debt, Fitch Ratings says. It will not affect the country's sovereign ratings.

We have previously said that debut eurobonds for some African issuers are equivalent to a significant proportion of their international reserves - with the median for new African issuers at 25%, and in some cases much more (see "SSA Sovereign Credit Overview" published in December 2013). If a eurobond were to mature at a time when market access were denied, then an issuer might have no alternative but to pay the bond out of possibly limited reserves.

A track record of debt repayment to private creditors and adequate debt management capacity, as well as efficient use of proceeds, will be important factors in assessing countries' non-concessional debt capacity - an important rating consideration.

Kenya's USD600m syndicated loan issued in 2012 to fund infrastructure investment was due to be repaid on 15 May. The government had intended to make the repayment using part of the proceeds of a forthcoming debut eurobond. However, this has been delayed.

The authorities considered repaying the facility out of reserves. Reserves currently stand at USD6.3bn (3.8 months of current external payments - CXP). Repaying the loan would have seen reserves fall to 3.4 months of CXP - still a comfortable level, particularly with a eurobond still likely to be issued in the coming months.

Instead, the authorities have opted to extend the facility for a further three months (until 15 August) at the same rate as the initial loan. Creditors not wishing to extend will be repaid. We understand that if the eurobond has not been issued by August, the syndicated loan will be repaid out of reserves.

Rescheduling a bank loan can, in certain circumstances, be considered a restricted default with the issuer placed in 'RD' if the loan is material relative to the total stock of sovereign debt. However, the creditors had proactively offered this option to the authorities as part of a debt and reserves management operation, and it is not the case that without the extension, a missed interest or principal payment would be likely. It will therefore have no impact on Kenya's sovereign rating.

The Kenyan authorities' timetable for issuing its debut eurobond was delayed: first by adverse market conditions, due to rising bond yields as a result of Fed tapering and; more recently by a decision by a UK court requiring the Kenyan government to pay USD16m for security and communications-related deals undertaken in the 1990s widely believed to have been corrupt. The government is unable to issue on international capital markets until these payments are made, which in turn need to be approved by parliament that is in recess until 2 June. Fitch affirmed Kenya's foreign currency sovereign rating at 'B+' with a Stable Outlook on 31 January 2014. The next scheduled review of the rating is on 25 July 2014.

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