BY MOHAMED WEHLIYE
The Anglo Leasing ghosts and the court judgements they obtained in the United Kingdom and Switzerland brings 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 ‘Vulture Funds’ held. Argentina has refused to pay because if it does so, it would open the floodgates and 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 for Kenya 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 that the country plans to issue in the next few months. All governments need to fund themselves, and Kenya is no exception: What’s more, all governments can borrow money from foreign investors, by issuing either foreign or domestic debt to those investors. But with these two court orders hanging over its neck, the government of Kenya could find it much more difficult to sell its debt in the international markets. And if it did, it will definitely have to pay a premium given that it will have to disclose in the sovereign debt prospectus, 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. I have heard some say that our overseas properties are protected under the Vienna Convention. Well, that could be true. But we must remember that not all Government of Kenya assets will have diplomatic protection. The ‘Vultures’ can go for commercial assets of the Sovereign. After years of pursuing Argentina through foreign courts, NML Capital for example, impounded Argentina’s naval vessel, Libertad, in the Ghanaian Port of Tema in October 2012 after obtaining a court order from a Ghanaian court. The Argentinian president also now flies on charter jets to keep her plane safe. No doubt President Uhuru Kenyatta may unfortunately find himself in similar circumstances.
But it is not only physical assets that these ‘Vultures’ will be targeting. They will also be after the government’s cash. Even if, say 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 those dollars into US bank accounts. Faced with an inability to directly affect GoK action, the ‘Vultures’ could instead go after an organisation whose hand it can force: The banks that will be responsible for issuing the sovereign bond. Armed with the judgments, they will force the concerned banks to pay them with the money Kenya hands over to pay its bondholders.
Paying the Anglo Leasing “Vultures” is surely unfair and painful. Any debt arising from these fraudulent deals is no doubt also illegitimate. It was forced onto us by ‘Vultures’ acting in concert with corrupt government officials. But we can’t run away from them now if there are indeed court orders issued in international jurisdictions where we would want to do business.
Unfortunately, international law does not exempt citizens of a corrupt regime from repaying a debt incurred by corrupt officials for personal and nefarious purposes. Government debt is supposed to be paid no matter who runs the country. I pity the Jubilee Administration because it is but just an innocent inheritor of some mess that it has to deal with or otherwise the country faces dire consequences. Just like the South African people today bear the debts of the apartheid regime that borrowed from private banks to finance the military and police and to repress the African majority, we Kenyans unfortunately somehow 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 Sh 1.4b Anglo Leasing debt could in effect force us back into the domestic markets, fuelling inflation and high cost of credit. That will cost us twenty times the figure we are trying to protect, in one year alone. The opportunity cost is quite immense. 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 makes sure that we get them so that they don’t get to enjoy the fruits of their ‘labour’. Those shouting over the roof tops ‘can’t pay, won’t pay’ would have to give us an alternative course of action. They would have to tell us how their intransigence will not extract a huge toll on the nation’s economy and exclude us from the international capital markets.
(The writer is Senior Vice President, Financial Risk Management, Riyad Bank, Saudi Arabia)