Opinion: Why Kenya must pay Anglo Leasing debt

By MOHAMED WEHLIYE

The Anglo Leasing-related firms and the court judgements they obtained in the United Kingdom and Switzerland bring to mind the current court battles between Argentina and some American “vulture funds”.

"Vulture funds" are funds run by investors who purchase cheap debt from distressed companies or countries in the secondary markets, and then seek repayment of the full face value together with interest, penalties and legal costs.

If this repayment is not made by the borrower, the creditor can impound assets of the country or company in an effort to force repayment. They can turn a bond purchased for five cents into a repayment of a full dollar, a phenomenal return on investment.

In the case of Argentina, the “vulture funds” bought the country’s debt cheaply when it had an economic crisis and speculated that the country would go bankrupt. When it did and defaulted, they refused to join the vast majority of Argentina’s creditors in agreeing to reduce the amount they were owed. The South American country had reached an agreement with most of its private creditors to pay 30 cents for every dollar owed under a restructured debt deal.

NML Capital, a US hedge fund that pioneered “vulture fund” activity by winning a case against Peru in the 1990s, sued Argentina. It won a landmark case last year in which a New York court asked Argentina to pay the full face value of the bonds the firm held. Argentina has refused to pay because if it does so, it would have to pay all the other creditors who accepted the restructured deals and moved on.

It has appealed to the US Supreme Court and if it does not succeed there, the country may have to default once again to get out of the current mess.

Of course the magnitude of the problem we face with our own Anglo Leasing “vultures” is not as big, but the consequences, if we fail to pay them, will be very real and equally painful.

No one knows how this whole thing is going to play out, but the Anglo Leasing ghosts and their lawyers aren’t stupid and must have closed all the obvious loopholes. They are definitely ready to attack.

As Cabinet Secretary Henry Rotich and other Treasury mandarins noted, the "vultures" first target will be the proposed Eurobond the country plans to issue in the next few months.

All governments need to fund themselves, and Kenya is no exception. But with these two court orders hanging over its neck, the Government could find it much more difficult to sell its debt in the international markets. And if it did, it would definitely have to pay a premium given that it will have to disclose the fact that there are some international court judgements against it and which it has failed to settle. Investors don’t like people who don’t pay their debts, irrespective of how those debts were incurred.

Kenyan assets outside the country will also be vulnerable to confiscation to enforce these court decrees. After years of pursuing Argentina through foreign courts, NML Capital, for example, impounded Argentina’s naval vessel, Libertad, in a Ghanaian port in October 2012 after obtaining a court order from a Ghanaian court.

But it is not only physical assets that these “vultures” will be targeting. They will also be after the Government’s cash. If the Government went ahead and issued the bond without settling this debt, the Anglo Leasing “vultures” could still catch up with it on the virtual streets of the international financial markets.

The Kenya bond will be a dollar-denominated debt, and whenever you’re dealing in dollars, various intermediaries are going to be transferring the money into US bank accounts. Faced with an inability to directly affect GoK action, the “vultures” could instead go after these banks. Armed with the judgments, they will force the concerned institutions to pay them with the money Kenya hands over to pay bondholders.

UNFAIR AND PAINFUL

Paying the Anglo Leasing “vultures” is surely unfair and painful. Any debt arising from these fraudulent deals is no doubt also illegitimate. But we can’t run away from them now if there are court orders issued in international jurisdictions where we want to do business.

Unfortunately, international law does not exempt citizens of a corrupt regime from repaying a debt incurred by corrupt officials for nefarious purposes. Government debt is supposed to be paid, no matter who runs the country.

Just like South Africans today bear the debts of the apartheid regime that borrowed from private banks to finance the military and police and repress the African majority, we Kenyans have to bear today the burden of past corrupt regimes.

We have no choice but to defer to international norm and accept responsibility for these debts because defaulting would hurt our chances of managing the economy.

The Sh1.4 billion debt could in effect force us back into the domestic markets, fuelling inflation and a high cost of credit. That would cost us 20 times the figure we are trying to protect — in one year alone.

In any case, this debt won’t go away. It will continue to pile up and some administration would have to settle it one day in the future. Let us pay the “vultures”, but also make sure we get them so that they don’t get to enjoy the fruits of their "labour".

Those saying, "Can't pay, won’t pay", would have to give us an alternative course of action. They would have to tell us how intransigence would not extract a toll on the nation’s economy and exclude us from international capital markets.

The writer is a senior vice president at Riyad Bank, Saudi Arabia.

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