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National Treasury’s move to go for a syndicated loan instead of Eurobonds as earlier anticipated has elicited mixed reactions from experts. The Treasury announced last week that it has abandoned plans to issue a Sh117 billion Eurobond ($1 billion) slated for end of July for syndicated loans.

According to Treasury Cabinet Secretary, Ukur Yatani, the decision was reached after the planned Eurobond became too expensive following Russia’s invasion of Ukraine.

A syndicated loan is a substantial loan provided to a large borrower by several lenders together. Each lender in the lending group (syndicate) provides part of the total amount and shares part of the lending risk.

“In our funding for this financial year, we factored in borrowing from the international market, the Eurobond. But we realised as a result of challenges in Russia and Ukraine the cost of borrowing has gone really high,” Yatani told a local daily.

Ken Gichinga, the chief economist at Mentoria Consulting, welcomed the move saying the 12 per cent rate the country was to pay for the Eurobond would have been too high and unsustainable.

He said the country should revise its borrowing policy in the long term with a view to borrowing more internally as opposed to external debt which is more susceptible to exchange rate fluctuations.

“Last year, we borrowed at six per cent, right now it stands over 12 per cent and this is no longer feasible. That is why we are still exploring options to look at a number of banks that can advance us the money at a cheaper rate, a figure more or less than a figure of last year, an average of six per cent,” Yatani observed. 

Samuel Nyandemo, a senior economics lecturer at the University of Nairobi, lauded the move by Treasury, saying the syndicated loan is less costly.

The university don called on the government to minimise wastage, reduce its borrowing appetite and shelve non-priority projects to improve the country’s economic performance. “It is good compared to the Eurobond because it is less expensive. It is easier to manage syndicated loans compared to a Eurobond,” he said.

Repayment rate

But Churchill Ogutu, a senior research analyst at IC Group, expressed doubts on the effectiveness of the move, noting that syndicated loans are structured in such a way that the repayment rate varies from time to time unlike the Eurobond whose repayment rate is fixed.

Syndicated loan repayment rate is tied to a benchmark called the US Secured Overnight Facility Rate (SOFR) which varies from time to time. In addition to this, one pays a fixed percentage as premium.

“I am really doubting the efficacy of this reallocation from Eurobond to syndicated loan. In syndicated loan the interest component is variable unlike Eurobond which is fixed,” he said.

“Right now, SOFR is at about 0.7 per cent. Tomorrow it could rise to 1.5 per cent. Six months down the line when we are making payments we do not know where SOFR will be,” he added.

He said Treasury was under pressure to finance the current budget, including a recent supplementary budget, from external financing at a time when the Eurobond has become pricey forcing it to look elsewhere for financing.

“Because they were caught between a rock and a hard place they had to do something if the Eurobond was not forthcoming. Hence, the syndicated loan,” he said.

Central Bank of Kenya (CBK) data shows that yields on the 10-year Eurobond maturing in 2024 have risen by 147 per cent year-to-date while returns on the 30-year paper maturing in 2048 are up by 34.9 per cent.

This is the first time Kenya is seeking for a syndicated loan since 2019 when it changed its borrowing policy to move away from commercial loans.