The government is not guaranteeing the Sh44.79 billion bond, the proceeds of which will be used for the construction of the Talanta Sports City Stadium, taking the shine off from the maiden asset-backed security.
Bondholders will be paid from National Treasury disbursements made to the Sports, Arts and Social Development Fund (SASDF), rather than from the proceeds of the stadium, underlining the crucial role that the exchequer is playing in the deal without giving explicit guarantee.
Sources said the government was unwilling to commit, having borne the burden of other institutions that defaulted after receiving its guarantee.
The issuer of the bond, Liaison Group, through a special vehicle Linzi FinCo 003 Trust, has arranged a standby letter of credit with KCB Bank to be used in case of delayed disbursements from Treasury.
The bond has been accorded an AA rating by South African agency GCR Ratings, with the absence of the guarantee denying it a higher rating.
An AA rating means the issuer has very strong credit worthiness.
“The indicative rating assigned to Linzi FinCo 003 Trust’s proposed transaction is supported by the relatively low risk in the receivables mandated to repay the noteholders and moderate government support,” said GCR Ratings.
“However, the transaction is exposed to some operational risks, which in the absence of an explicit government guarantee places a cap on the rating,” added the rating agency.
Bondholders will be paid every six months, in principal and interest, from a portion of the Sh6.29 billion that the SASDF is allocated by the Treasury annually.
In the event of the Sports Fund being dissolved, the bondholders will be transferred to the National Exchequer Account, discloses GCR.
“The transaction has the benefit of support and scrutiny from National Treasury, the Attorney General, the Auditor General and the Ministry of Sports, thus limiting the potential diversion of funds provided to the issuer,” said GCR Ratings.
A guarantee, however, is more comforting as it binds the government to repay and can be legally enforced.
In January this year, the Treasury was forced to make an emergency withdrawal of Sh19.3 billion, without parliamentary approval, to repay eight commercial banks for unpaid loans to Kenya Airways that had been guaranteed by the government.
A default of such a guarantee would have been deemed a default by Kenya, which would have hurt the country’s credit rating.
The government has opted to source for funds from the public in order to complete the 60,000-seater stadium before the 2027 African Cup of Nations (Afcon) being hosted in the country.
Talanta Sports City Stadium is one of the venues expected to host the biennial continental tournament, which Kenya is co-hosting with Uganda and Tanzania.
As of April, 37 percent of the stadium had been completed, with the government having paid only five percent of the total construction cost.
The contractor, China Road and Bridge Corporation, has agreed to continue the work while the government raises funds.
The Ministry of Defence is the contracting authority of the project, having been given supervisory powers by President William Ruto owing to the army's reputation for prompt execution. SASDF is the project originator.
The fund, which was created under the 2018 Public Finance Management Regulations, has been allocated Sh13.5 billion for the financial year starting in July.
