Ratings agency S&P Global has warned that Kenya’s credit rating could be downgraded if the Treasury’s frequent loan refinancing moves trigger concerns that the country is struggling to repay debts.
The credit ratings agency has taken note of Kenya’s debt refinancing operations, which have prompted borrowing to repay earlier debts and switching bonds to avoid paying the principal amount.
It warns that the debt restructuring, which has become frequent in recent months, could send signals that Kenya is struggling to repay its mountain of public debt, raising fears of default.
The fears could trigger the risk of credit rating downgrades.
In its statement last week after keeping Kenya’s long-term sovereign credit rating at ‘B’ with a stable outlook, S&P said an erosion of Kenya’s forex reserves and an increase in interest costs would also potentially cause a rating downgrade due to their strain on the country’s fiscal position.
Forex reserves currently stand at a near all-time high of $15.16 billion (Sh1.96 trillion).
Besides the $2 billion (Sh259 billion) June 2024 Eurobond maturity that caused jitters in the market over potential default, none of Kenya’s other recent debt restructuring has raised concerns that meet S&P’s default thresholds.
“We could lower the ratings if Kenya’s external refinancing pressures mount, likely due to a sustained decline in foreign exchange reserves; or if we perceive any debt-repurchase operations—domestic or external—to be akin to a distressed exchange,” said S&P.
“We could also lower the ratings if fiscal pressure further raises the government’s already-elevated interest costs.”
In a buyback, the government repurchases an existing security from investors, effectively making an early redemption of the debt.
Kenya’s buybacks that have mainly targeted Eurobonds have been financed through proceeds of new issuances.
A switch or swap bond occurs when holders of a paper that is approaching maturity are offered the exclusive chance to move all or part of their principal directly into another longer bond.
Ordinary rollovers, on the other hand, see investors wait until they are paid back their principal by the Central Bank of Kenya (CBK) before making bids in the monthly bond sales, where there is no guarantee their offers will be accepted.
In the current fiscal year, the government is increasing its frequency of domestic switch bond issuances to one per month, targeting Sh10 billion to Sh20 billion each.
Previously, the government opened the swap bonds on a need basis, targeting securities whose repayment would otherwise cause a strain on the Exchequer.
For the fiscal year ended June, the CBK offered four switch bonds executed between January and May, which pushed forward maturities valued at Sh66.8 billion that were due in the next two years.
Domestic switch bonds have also tended to offer investors a higher interest rate compared to the holdings they have been asked to swap.
The government is looking to retire at least $500 million (Sh64.7 billion) of high-cost external debt during the current fiscal year, signalling a return to the bond buyback plans that have been executed in the last two years.
In February, the National Treasury made a partial buyback of $415.4 million (Sh53.7 billion) in outstanding Eurobond debt due in 2028 and 2032.
The repurchase was financed using the proceeds of a new $2.25 billion (Sh291.2 billion) Eurobond issuance, whose two tranches are due to be repaid in 2034 and 2039.
When Kenya made its first such repurchase in February 2024 (targeting $1.4 billion on the maturing June 2024 Eurobond), ratings agencies including Moody’s warned that they would consider the action a default if Kenya bought back the notes at a price below par value, which would constitute an economic loss to investors.
In the end, Kenya bought back the bond at par value of $1,000 per bond unit, avoiding the default tag. Subsequent Eurobond buybacks have been made at prices offering a premium on the par value.
In its previous rating action in August 2025, S&P had upgraded Kenya from ‘B-‘ to ‘B’, on the strength of reduced near-term liquidity risk for the Exchequer.
The letter categories indicate the creditworthiness of an issuer, with a range from AAA, which is an investment-grade rating showing strong ability to meet obligations, down to D, which indicates a default.
A “B” rating is a non-investment grade that shows that an issuer is vulnerable to adverse conditions, but is deemed capable of meeting obligations to creditors.
S&P’s affirmation of Kenya’s ‘B’ rating comes months after fellow agency Moody’s upgraded Kenya’s long-term foreign currency sovereign credit rating to ‘B3’ from ‘Caa1’, saying the country’s risk of debt default had eased due to the higher forex reserves, a stable shilling and a lower current account deficit.
S&P and Moody’s had downgraded Kenya’s rating in 2024 following the cancellation of the Finance Bill, 2024 after widespread youth protests. The withdrawal of the Bill left the National Treasury with a Sh346 billion tax hole, prompting it to raise borrowing to cover the deficit.
Lenders in the international market rely heavily on credit ratings to determine the pricing of sovereign debt, with private sector borrowing from these markets in turn pegged on the government’s pricing profile.