It should have been a triumph that would revive Kenya’s status as a favourite with foreign investors. Instead, the country’s long-awaited debut on the sovereign bond market has become entangled in a decade-old corruption scandal.
Eight years ago, Uhuru Kenyatta – now Kenyan president but then just an opposition lawmaker – led the parliamentary accounts committee investigating what became known as the “Anglo Leasing” scandal. The committee looked into a series of 18 grossly overpriced security contracts with ghost companies worth a combined $770m, and branded them “a scam”.
Last month, however, Mr Kenyatta authorised $16.4m in payments to two of the 18 companies involved to settle court rulings that had gone against the Kenyan government after the issue resurfaced in London and Geneva.
Although the president’s office said the payments were “painful” for Mr Kenyatta, it said failing to honour Kenya’s commercial debts – even those relating to “fraudulent transactions” – put the economy at risk by potentially holding up the launch of the sovereign bond worth up to $2bn . The bond is key to help grow Kenya’s economy by building infrastructure and is also needed to repay a $600m loan taken out two years ago with a syndicate of international banks.
The payments to the “Anglo Leasing” companies have already held back the launch of the bond by several months, forcing Kenya in May to sign an expensive 11th-hour deal to extend the maturity of the loan until mid-August.
Nairobi could have paid the $600m loan – underwritten by Citigroup, Standard Chartered and Standard Bank – immediately with its hard currency reserves, which stand at more than $6bn, but that would have hurt its international standing in the capital markets, bankers say.
Bankers and some investors say paying the “Anglo Leasing” companies was a good idea to avoid any legal battle scaring potential investors. Nonetheless, Fitch, the rating agency, says Nairobi could have legally issued the bond without paying the commercial debt – even its credit rating would have been unaffected.
The presidency justified the payments, explaining that to do otherwise would “irreparably injure Kenya’s reputation”. But John Githongo, the corruption-busting official who first exposed the “Anglo Leasing” scandal and later fled the country, says Kenya’s reputation was irreparably damaged long ago.
“We are going to have to pay off a bunch of ghosts [companies] so we can borrow more money that we might end up giving to another bunch of ghosts,” he says in an interview. “There is no precedent for such a borrowing [as the sovereign bond] being spent on the right stuff in Kenyan history,” he adds.
The government’s supporters say it would have been unthinkable not to pay the court-sanctioned debts, which were accruing $1m in interest a year. “It is very important that this [bond] issue goes well with no legal hindrances and no risk of an injunction,” says an international official.
Investors have been lining up for months to take a chunk of the maiden bond of east Africa’s top economy, attracted by the prospect of high yields. If the interest holds – and bankers and potential investors say the signs are positive – Kenya would be able to raise the funds at relatively affordable rates.
But the saga is a powerful reminder of the dangers of investing in African frontier markets such as Kenya, where the political risks are elevated and often unappreciated by foreign investors and scandals regularly expose state weakness.
“The eurobond is still very nicely anticipated but it [the Anglo Leasing affair] is politically toxic,” says one investor.