(Bloomberg) -- Kenya’s eurobonds plunged Friday after President William Ruto said rich countries should work toward “a new sovereign debt architecture” to provide relief for poor nations.

While Ruto didn’t refer to Kenya specifically, investors were “spooked” by his remarks on debt restructuring, according to Yvette Babb, local and hard currency portfolio manager at William Blair.

Yields on the nation’s dollar bonds due 2032 soared 41 basis points to 12.36%, the highest in four months on a closing basis. The extra yield investors demand to own Kenya’s eurobonds rather than US Treasuries widened 47 basis points to 810, according to JPMorgan Chase & Co. indexes.

Ruto said a new debt framework should “extend the tenor of sovereign debt and provide a 10-year grace period” for highly-indebted poor nations. 

“The global community must therefore develop a debt restructuring initiative that does not wait for nations to plunge over the cliff before providing relief,” he said in a speech to the UN General Assembly.

Debt Burden

Kenya’s debt burden has become a focal point for investors as the country faces skyrocketing energy and food import bills, as well as low foreign-exchange reserves. 

The government has hired lead managers to advise on issues surrounding the repayment of $2 billion of bonds due next year. Ruto in June vowed to buy back half of the 2024 eurobonds before the end of this year.

S&P Global Ratings in August warned that Kenya’s ratings may be lowered “if we perceive any potential debt-repurchase operations to be akin to a distressed exchange.” Moody’s Investors Service has also cautioned that redeeming the bonds at a price below par value would constitute an economic loss to investors and could be treated as a default.

“I think investors are still pondering the way forward with the maturity in June, what the implications could be in terms of Kenya’s external position,” said Gergely Urmossy, an emerging-markets strategist at Societe Generale in London. “Based on the market pricing, I think many fail to see an obvious catalyst to organically generate extra hard currency funding.”

The country’s current foreign exchange reserve position — $7.07 billion on Sept. 14 — “does not provide a comfortable outlook for managing its external financing needs,” according to Mohamed Basha, head of macro research at EFG Hermes.

Kenya’s forecast of a wider budget deficit in the year through June 2024 is “another cause of concern for investors as it means there is need for more financing,” Basha said in an emailed response to questions.

Kenya is at high risk of debt distress and in February 2021 signed a 38-month IMF program to help reduce debt vulnerability. Kenya and the IMF in May agreed to extend the duration of the program by 10 months to April 2025.

--With assistance from Colleen Goko.

(Corrects eighth paragraph to reflect Moody’s view that redeeming the bonds at a price below par value could be treated as a default, in story published on Sept. 22.)

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