Explainer: Just what is a Eurobond? - VIDEO

Daily Nation's Business Editor and Financial Investigative Writer Paul Wafula helps explain what the Eurobond is all about.

------------------------------------------

Kenya on Wednesday issued a Sh210 billion Eurobond to UK and US investors. The government's insatiable appetite for foreign debt has seen it borrow a total of Sh692 billion in the past five years in Eurobonds.

So just what is a Eurobond?

First, it does not necessarily mean that the bond is issued in Europe or uses in the euro currency. So, a Eurobond is a financing tool issued in a foreign currency outside the borders of the country borrowing.

For instance, the Kenyan bond has been issued to investors across Europe and the US, and is denominated in US dollars.

A bond is simply a promise that an investor will be repaid their debt (loan made to the borrower) at a future date and at a particular interest rate.

This type of financing does not necessarily require a security and that is why only governments with a good credit record and low risk of default succeed to raise money by this method.

The money raised through Eurobonds forms part of the foreign debt stock for a country.

Is this a trend in Africa?

Yes, Eurobonds have been gaining traction in African countries in recent years since they are very flexible and offer investors the ability to pick the country of issuance based on the existing regulatory environment, the interest rates on offer and the depth of the market in general.

Another reason they have become attractive to investors is because they can have small par values, making them accessible to investors who are not deep pocketed.

The growing budget deficit has left the Kenyan government with fewer options to finance its ballooning expenditure and this has made borrowing one of its easiest ways to raise plug the hole.

The inaugural Eurobond was issued in 2014 where a total of Sh280 billion was borrowed.

The government went back for another Eurobond last year where it netted Sh202 billion. With the new Sh210 billion bond this year, Kenya will have raised in excess of Sh692 billion in three Eurobonds in five years.

Is there other options for government?

Yes. It is not just the Eurobond that is on the radar of the National Treasury. In the coming year that starts in July, Treasury says it will explore five new bonds among them Chinese and Japanese bonds as it moves to find new alternatives to satisfy its insatiable appetite for debt.

These new options include the Islamic financing instruments, green bonds, Samurai and Panda bonds and diaspora bonds over the medium term.

In seeking the new financing options, Treasury hopes to diversify the sources of external debt and reduce over reliance on current sources of debt financing.

“The government will continue to diversify the sources of financing over the medium term by maintaining a presence in the international capital markets,” Treasury says in a budget document presented to Parliament recently.

What are Samurai and Panda bonds?

Samurai bonds are yen-denominated bonds usually issued in Tokyo by non-Japanese companies. These bonds are subject to Japanese regulations.

Panda bonds are Chinese renminbi-denominated bonds designed to allow borrowers to tap into China’s large investor base.

Kenya has been increasingly turning to China for debts to fund its infrastructure projects and this has seen China upstage western countries to become Kenya’s biggest lender.

Islamic financing instruments also known as Sukuk bonds seek to provide sharia-compliant capital and are popular in the Middle East nations while green bonds target lenders who are keen on funding climate and environmental projects exclusively.

On their part, diaspora bonds will target Kenyans living abroad. Usually diaspora bonds help migrants to receive discounts on government debt from their home countries.