Kenyas first foray into the international private debt market in over 20 years should be watched closely by other African sovereigns looking to tap foreign bond markets.
The $600 million (383.2 million) syndicated facility, signed by the Ministry of Finance last month, is a rare example of a sovereign standalone bank financing. The Ministry's statement, however, makes clear its plan to take out the two-year loan with a eurobond.
The deal shows other strong African economies how to take a staggered approach to accessing cheaper borrowing in the international bond market.
For countries aspiring to tap the bond market, this deal shows its possible to gain exposure to international markets and documentation first through a syndicated loan structure, and then climb the curve, said Arnold & Porter partner Whitney Debevoise, who acted for the borrower.
The syndicated loan could be assembled more quickly than an inaugural bond issue, and the structure allows Kenya to springboard into the bond market with minimal expense and without having to offer security.
The two most important features in this regard are a tenor of just two years (meaning a lower interest rate) and the loan being a general obligation borrowing.
It seems that another reason why a loan was preferred at this point in time is the possibility for negative investor sentiment following the countrys 2008 post-election violence. This political backdrop meant investors needed to be convinced that Kenyas constitutional reforms (to be funded in part by the loan proceeds) are coming together.
It can be more difficult to obtain bondholder confidence in these scenarios. Apparently the lead banks, in this case, overcame any concerns about the political backdrop.
The cross-border financing also shows domestic bond investors that the country has alternative and cheaper sources of funding.
In its statement, the Ministry noted that the loan will boost international reserves and therefore help stabilise the volatile Kenyan shilling. For this reason, it was important for the loan to be syndicated among international sources.
I think they succeeded in a structure that will attract new hard currency to Kenya rather than just a recycling of existing resources in the country, which is important, Debevoise said.
Mark of confidence
As a general obligation borrowing, the $600 million facility comes with no security, guarantees, pledges or other credit supports. It is denominated in US dollars meaning the lenders had to get comfortable with the currency risk.
In this sense, the loan is a mark of confidence in Kenyas monetary policies, growth rates and politics.
There have been very few general obligation borrowings by sovereigns since the sovereign debt restructures of the late 1980s and early 1990s. Multilateral and development banks have been the backstop international funding source for the region.
Aside from South Africa (which is a regular issuer), the only other African countries to issue bonds internationally are Ghana, Nigeria and Gabon.
A greater role
In effect, last months loan is Kenyas inaugural international financing. This meant external counsel had greater involvement in the deal mechanics.
We had a significant role in the negotiation of the mandate letter and were not just handed something that had already been closed by the parties, Debevoise said.
Some of the most important points in this regard were forum and process contained in the dispute resolution clause, and the scope of the sovereign immunity waiver. The syndication structure along with interest rate and fee calculation also needed close attention.
Guidance was also needed on the role of carve outs in clauses such as negative pledge and cross default, and, said Debevoise, the firm helped Kenya negotiate such clauses.
Given the syndicated loan market in Africa is still underdeveloped, there is a lack of standardised documentation. The launch last September of the African Loan Market Association (ALMA) should help produce more uniform standards.
However Kaplan & Stratton partner Oliver Fowler, ALMAs Kenya representative, said while the association is active in South Africa, the East African working group is still in its formative stages.
On 15 May 2012 Kenyas Ministry of Finance signed a $600 million (KSh50.15 billion) two-year term loan facility arranged by Standard Chartered Bank (London), Citibank (London) and The Standard Bank of South Africa. The first disbursement of $240 million occurred on June 1 and the loan was still in syndication at the time of press. The facility is governed by UK law.
Arnold & Porter acted for the Ministry of Finance and SNR Denton assisted the lead arrangers in drafting the loan agreement.