New Sh70bn bond tests resolve to cut domestic debt

The government is seeking Sh70 billion in an infrastructure bond (IFB) sale that will test the resolve of the Central Bank of Kenya (CBK) to keep the cost of domestic borrowing in check.

The eight-and-a-half-year infrastructure bond, which is the second of its type being sold in the current fiscal year, has been floated in a period of heavy maturities of government debt, underperforming revenue collection and external borrowing, raising the pressure on CBK to take up expensive bids in bond sales.

The bond will be on sale until February 14, having hit the market on Wednesday.

In February, domestic debt service obligations—maturities plus coupon payments—are estimated at Sh280.9 billion, nearly half of which lies on maturities of the 91-day Treasury bill.

The Treasury’s latest statement of revenue and expenditure (for December 2023) showed that the tax revenue for the first six months of the fiscal year stood at Sh1.05 trillion, equivalent to 42 percent of the full-year target of Sh2.49 trillion.

Read: CBK faces upward rates pressure in January bond sales

Analysts have also pointed to the tougher stance taken by investors in the January bond sale as an indicator that investors will continue demanding a premium for lending to the government.

In the January bond that sought Sh35 billion, the CBK was forced to leave Sh12 billion on the table from bids of Sh37.2 billion in the initial sale after some investors asked for more than 19 percent in interest.

In the subsequent Sh15 billion tap sale meant to mop up the rejected bids, investors offered Sh11.8 billion.

“The trend, at a time when the fiscal agent is behind its domestic borrowing schedule, could force the CBK to continue accepting aggressive investor bids which portend higher pressure on domestic interest rates in the near/medium-term,” said analysts at NCBA Capital.

The tax-free infrastructure bonds—which are not benchmark bonds— have, however, tended to be an outlier in terms of interest rates compared to normal fixed-term bonds.

The 6.5-year November IFB for instance paid investors an average return of 17.93 percent. An ordinary bond of a similar tenor, which carries a tax obligation of 10 percent on interest would need to pay 19.92 percent to give an investor a net return that is equivalent to that of the IFB.

This attractive tax-free return has made infrastructure bonds popular with both local and foreign investors, with the latter usually taking less interest in ordinary bonds.

The November IFB, which sought Sh50 billion on the initial sale, raised bids worth Sh88.9 billion out of which the CBK took up Sh67.1 billion.

Read: Investors book record returns in the March infrastructure bond

Despite the oversubscription and acceptance of a higher-than-targeted amount, the Treasury rolled out a tap sale on the offer that sought Sh25 billion but ended up raking in Sh47.8 billion from investors after yet another oversubscription.

This bodes well for the Treasury’s efforts to raise a substantial share of its Sh471.4 billion net domestic borrowing target for the current fiscal year from the February IFB.

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