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A Eurobond is a bond that is issued in a currency other than the currency of the country where it is issued.
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Eurobonds are usually long-term debt instruments and are typically denominated in US Dollars.
Image: FILE
Kenya successfully issued a new Eurobond worth $1.5 billion (Sh238 billion) to buy back the inaugural one due on June 24.
The move elicited sharp reactions from financial analysts on whether it was the right move.
The return to international bond market is expected to alleviate the mounting pressure on domestic debt interest rates, assuage investor concerns, and reinforce investor confidence in Kenya’s commitment and ability to repay its maturing debt in June.
But what is the Eurobond?
A Eurobond is a bond that is issued in a currency other than the currency of the country where it is issued.
They provide a platform for governments, multinational corporations, and international organisations to raise significant capital outside their domestic markets.
Eurobonds are usually long-term debt instruments and are typically denominated in US Dollars.
Eurobond has nothing to do with Europe or its currency.
Investors of the Eurobonds are generally large companies, banks, financial institutions and governments. They are paid interest on an annual basis and the principal amounts at maturity.
The government essentially asks investors to lend it money on the promise that it will pay it back with interest.
The government, through the Central Bank of Kenya, gives the private investors a piece of paper known as a bond. The CBK then collects on the government's behalf the cash in the form of a loan.
There are various reasons why a government would prefer a Eurobond to borrow domestically.
Successful Eurobond issuance gives a country credit worthiness it may need in international capital markets. The issuance may attract foreign capital flow owing to increased investor confidence.
The Kenyan shilling extended gains on Wednesday, hitting its strongest in more than three months as confidence the government would pay off a Eurobond maturing in June buoyed investor appetite.
High domestic borrowing by the government to finance the budget deficit or mega projects increases the competition for funds in the local market and drives up interest rates.
It is for this reason that governments borrowing from overseas markets can be good for the economy.
Issuance of a Eurobond as an alternative source of money is good for financing huge government projects like railways, roads, energy and water.
The government also borrows less from domestic markets to allow commercial banks to lend the excess elsewhere. The extra supply of cash helps to bring down bank lending rates to the various sectors of the economy.
The government's huge domestic borrowing is normally insensitive to interest rates.
The government, being the largest borrower, would ask for any amount regardless of interest rates.
As long as the government is willing to borrow immensely, commercial banks would prefer to lend to the State rather than the people.
But Kenya will pay heavily to avert a default of the $2 billion Eurobond maturing in June after it settled on a higher rate on its return to the global debt market to finance the early buyback.
Kenya has offered investors 10.3 per cent on its new seven-year $1.5 billion Eurobond.
Some like Thuo Ndung'u, an economics professor and a partner at Mind Frame Consulting wonder why the country had to float a bond to retire the old debt despite several multilateral and commercial loans hitting the exchequer account in recent days.
"Borrowing at 10.3 per cent to settle a debt that we took at 6.8 per cent is a huge gamble. It was unnecessary and is expected to pile pressure on the country's already high public debt," says Ndung'u.
According to him, Kenya has received a lot of funds in recent days, enough to settle the $2 billion loan which continues to pose fiscal risks for the country.
"Last month, the International Monetary Fund (IMF) wired in an equivalent of Sh109 billion, followed by another $210 million (Sh33.7 billion) from the Trade and Development Bank (TDB). Where did the money go to," says Ndung'u.
"We should put a break to unnecessary borrowing if we want to be fiscally sane. We have already overstretched debt beyond the Sh11 trillion limit. This is not good."