How Eurobond owners forced Kenya to forgo G20 debt relief

Economy

How Eurobond owners forced Kenya to forgo G20 debt relief


The National Treasury Building. FILE PHOTO | NMG

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Summary

  • A covenant in the terms of the Eurobond prevented Kenya from requesting a suspension of debt payments under a G20 initiative to help poor countries overcome the Covid-19 pandemic. 19.
  • The Group of 20 major economies had agreed in April to suspend payment obligations on bilateral debt owed by their less-developed counterparts until the end of the year.
  • The aim was to free up more than $20 billion (Sh2 trilion) that poor or struggling governments could use to strengthen their health services.
  • Treasury Secretary Ukur Yatani told the business daily in an interview that Kenya had chosen not to apply for debt suspension due to a number of reasons, including the terms of the Eurobond, fears that the relief could hurt the credit rating from the country.

A covenant in the terms of the Eurobond prevented Kenya from requesting a suspension of debt payments under a G20 initiative to help poor countries overcome the Covid-19 pandemic. 19.

The terms of the Eurobonds indicate that failure to pay Kenya’s external debt, including seeking moratoria, would be considered a default, which could trigger a demand for the country to pay all of the Eurobonds in full. worth $6.1 billion (652.7 billion shillings).

This means the Treasury could be forced to pay eight times the 72 billion shillings relief it would have received for a freeze on bilateral loan repayments.

The Group of 20 major economies had agreed in April to suspend payment obligations on bilateral debt owed by their less-developed counterparts until the end of the year.

The aim was to free up more than $20 billion (2 trillion shillings) that poor or struggling governments could use to strengthen their health services.

Treasury Secretary Ukur Yatani told the Business Daily in an interview that Kenya chose not to seek debt suspension for a number of reasons, including the terms of the Eurobond, fearing that the relief harm the country’s credit rating.

“The conditions were very restrictive. They say you shouldn’t borrow commercially, but we’re already holders of commercial paper like Eurobonds and the clause in that Eurobond says if you don’t pay debt on a bilateral issue or on any other issue, you are deemed to have defaulted,” Mr. Yatani said.

Clause 10 of the Eurobond prospectus states that holders of 25% of the notes can trigger a call for the full loans and interest in the event of default.

Some of the actions that Eurobond terms consider default include non-payment of principal for 15 days or interest for 30 days and non-compliance with contract terms for 45 days.

Eurobond holders can list Kenya as defaulter if the country fails to pay external debt or collateral worth more than $25 million (2.6 billion shillings) or obtains a moratorium on foreign loans.

Kenya will also be deemed to be in default if it ceases to be a member of the International Monetary Fund or if it is not eligible to use the resources of the Bretton Woods institution. The country can also be called a defaulter if it refuses to pay the Eurobond, takes legal action or changes the law relating to it.

In the event of a default, Kenya can only be saved if 50% of investors agree not to recall the debt immediately.

“An acceleration declaration may be canceled in certain circumstances by the written resolution of the holders of at least 50%,” the Eurobond’s prospectus states.

Kenya has five Eurobonds ranging in duration from seven to 30 years, with the last one set to repay in 2048.

Mr Yatani argued that Kenya can only be part of the G20 initiative if private lenders like the Eurobond type are part of the debt relief efforts.

“So if we rush in and say we don’t pay, even if we don’t default on their (Eurobond), the fact that we don’t pay on the bilateral debt is deemed to have already defaulted,” he said. he declared.

“It is a conversation that we are engaging in to also bring these commercial entities on board to ensure that they agree on a moratorium. Until that is agreed, we do not want to rush.

The G20 initiative only covers official bilateral debt, although it calls for the voluntary participation of private lenders on comparable terms.

A third of Kenya’s external debt of 3.2 trillion shillings is owed to private creditors, including holders of the country’s Eurobonds.

The Covid-19 pandemic caused the government’s budget deficit to swell to 8.2% of GDP in the financial year ending June, compared to an initial forecast of less than 7%, mainly due to the reduction collection of taxes and loss of earnings in the form of VAT and income tax reduction.

But the deficit is expected to narrow to 7.3% – or 823.2 billion shillings – in the 2020/21 financial year and to 4.2% of GDP by 2023/24, according to Treasury data.

Moody’s downgraded Kenya’s outlook to negative from stable on May 7, citing the shock caused by the Covid-19 pandemic to its tourism industry and agricultural exports.

Last month, the IMF lowered the country’s risk of debt distress from high to moderate.

The Treasury was also concerned that the terms of the debt relief limiting countries’ access to international capital markets during the status quo could hamper Kenya’s ability to finance its deficit later in the year.

Relatively wealthy Angola has requested debt relief from the G20. The country is heavily dependent on oil revenues and is saddled with debts that exceed its economic output.

It is grappling with the economic fallout from the coronavirus disease pandemic and an oil price shock that saw crude prices plunge below $20 a barrel in April.

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