East Africa: States review loan deals as UK-based overnight credit facility looms


After the 2011 “scandal” of widespread allegations of manipulation, it became clear that the global benchmark Libor rate had been manipulated for years.

Kenya is revising its loan contracts before the London Interbank Offered Rate (Libor) ceases to bring them into line with the new risk-free rates, The EastAfrican has learned.

The government is already negotiating with sovereign bondholders, commercial banks and other bilateral and multilateral creditors to agree on the revaluation of more than $ 36 billion in external loans to guard against a possible rate hike. interest from January 1, 2022, after the phase out of the global reference rate used to determine the cost of loans.

Libor, introduced in 1969 and formalized in 1986, is expected to be phased out on December 31, 2021, amid uncertainty over its eventual replacement. The benchmark was supposed to show the average interest rate at which the selected banks – the panel banks – would be willing to extend unsecured loans. It is used as the base or benchmark interest rate in financial contracts.

But after the great “Libor scandal” of 2011, following widespread allegations of Libor manipulation, it became clear that the benchmark had been manipulated for years. This led to a full-fledged investigation, and the UK Financial Conduct Authority, which oversees global benchmarks, announced in 2017 that the use of Libor would end on December 31, 2021 for the pound sterling, euro, the Swiss franc and the Japanese yen. .

Liquidity premium

While alternative benchmark interest rates have been developed nationally in the run-up to December 31, there is still no global consensus on replacing the Libor, in part due to the fact that rates without alternative risk (RFR) are coordination at the level of currencies, jurisdictions and globally has not been very strong.

These alternative rates include the Swiss Average Rate Overnight (Saron) in Switzerland, the Secured Overnight Financing Rate (SOFR) in the United States and the Sterling Overnight Interbank Average Rate (Sonia) in the United Kingdom. It is argued that SOFR and Sonia stand out as the main candidates for the new benchmark rate and are likely to be lower than Libor, as they do not take into account credit risks and the term liquidity premium.

In Nairobi, Treasury Director of Debt Management Dr Haron Sirma this week confirmed that they “actively discuss, assess variable interest rates for loan contracts with creditors before the termination date. publication of the Libor and replacement with the equivalent risk-free rates and manage the risks and accounting issues that arise therefrom.

Dr Sirma said foreign exchange markets continually react to news of the transition and “minimal adjustment in the costs of floating rate debt is expected”.

Adjust reimbursements

The economies of Tanzania and Uganda respectively have at least $ 24 billion and $ 12 billion in external debt to renegotiate by December 31, according to figures from their central banks.

Kenya has over 400 billion Ksh ($ 3.7 billion) of external debt repayments due in FY2021/2022, of which 138.36 billion Ksh ($ 1.28 billion) and Ksh 262.09 billion ($ 2.4 billion) interest payments on foreign debt and foreign debt principal repayment respectively.

In April of this year, Kenya’s cumulative debt service to bilateral creditors was 25.38% of total debt service, while commercial and multilateral creditors accounted for 57.99% and 16.63% respectively, according to the report. figures from the national treasury. The government paid 80.2 billion shillings ($ 743 million) in interest on the foreign debt for the nine months ending March 31, 2021.

Daniel Kuyoh, a Nairobi-based financial analyst, says interest payments will change next year as lenders adjust to the new guidelines.

“They (the interest payments) could adjust either way,” he said.

The State Bank of Mauritius (SBM) has already warned that the exposure to Libor on its Mauritian and Kenyan operations is “significant” and that the bank is facing a significant impact in terms of changes in fair value on financial instruments and loss or gain of interest income.

“The major risk in this area (interest rate risk) is the uncertainty over the new risk-free rates and spreads which will replace the Libor on December 31, 2021 and June 30, 2023. The Group has already started working on a study of impact. and the way forward at the entity level, ”said SBM in its 2020 annual report.

“For SBM, exposure to Libor is significant and the impact will potentially be significant in terms of changes in fair value on financial instruments and loss or gain of interest,” the report said.

John Gachora, Managing Director of NCBA Bank Group, says financing by development finance institutions in the East African market is often Libor based and some price realignment can occur, the top-rated three- and six-month USD Libor ceasing to be listed in June 2023.

But the impact of the transition will be significant on markets which have large volumes of liquidity and derivative hedging solutions.

“These instruments are less present in East African markets and therefore the impact of the Libor transition will be weaker than in developed markets. Many customer advances in this market are variable rate as opposed to the variable rate linked to the Libor benchmark, hence the expected lower impact levels, ”said Mr. Gachora.

Proposed replacement

Wycliffe Shamiah, chief executive of the Capital Markets Authority, said lenders switching to other indices may see higher base rates in the future, noting that proposed replacements for Libor are country specific and not will not allow an easy comparison between cross-border investments.

“Libor was available in multiple currencies while its substitutes are denominated in local currencies, increasing investors’ exposure to exchange rate fluctuations. In addition, Libor substitutes tend to offer a narrower range of forward rate deals, ”Shamiah said.

Others say that even if it is disruptive, the markets will handle the transition well because they knew it was coming for a few years.

“The contracts have taken this change into account in the meantime and market players have adjusted accordingly,” said Kihara Maina, managing director of I&M Bank Kenya.

Experts from PricewaterhouseCoopers (PwC) say all contracts using Libor as a benchmark rate will need to be identified and assessed in terms of impact.

“Any contract that refers to Libor, whether apparent or hidden, will need to be carefully reviewed. Lenders should begin to take an inventory of all contracts that could be affected, including those outside of treasury functions,” he said. the company’s Ugandan consultants said in an April statement. 2021 Note How Ready Are You for the Libor Phase-Out?

According to PwC, Kenya has a strong influence in the global finance and currency market, with many international currencies based on forward rates flowing freely. As a result, the Libor halt could negatively affect several market players in the country that hold Libor-referenced debt, including banks and other financial institutions, asset and fund managers, non-bank lenders and even the government. .

“The transition will pose significant fiscal, accounting, legal and administrative challenges with potential cost implications. Doing nothing will create an operational crisis once LIBOR comes to an end,” PwC said.

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