State set to launch eight-year infrastructure bond

Long-term institutional and retail investors have yet another opportunity for tax-free bond offer with an eight-year infrastructure bond scheduled to be rolled out this month.

While investors will also be in a position to diversify their holdings away from other types of investments such as the volatile shares market, they will save 15 per cent withholding tax as well as 30 per cent income tax in the case of institutions thereby raising their individual returns.

A similar bond was offered last December, the second such offer in 2009 following an earlier one in February.

There is a possibility of the coupon (interest) rate on the coming bond being lower because similar rates on the Nairobi bourse have been going down, even though commercial bank lending rates have hardly moved.

In an advisory report, Dry Investment Bank said: “The next tax-free government infrastructure bond is expected in February 2010…We recommend purchase of this bond for current Kenya shilling income. These bonds also trade on the secondary market so investors should be able to exit these bonds relatively easily.”

Mr Timothy Karanja, a senior investment analyst at the Investment Bank, said that he expected the take up to be high given that interest rates on the alternative investment vehicles like Treasury bills that are only up to a year in maturity (occupying the so-called shorter end of the yield curve) are in decline.

“Investors would rather lock their investments in the higher rates of the bonds because the yields on the shorter end are really going down,” said Mr Karanja.

He said that foreign interest in the Kenyan securities market was also likely to be a factor in the subscription enabling higher take up. In the equities market, foreign investors have also been seen as key to the rise in the price of the blue chips.

Going forward, even long-term interest rates such as that of bonds are likely to decline, he explained, making it all the more necessary to grab whatever was currently available in the market.

The market leaders meeting held on Tuesday is said to have approved the issuance of the debt security intended to finance long-term projects.

In an interview before the meeting, the chairman of Bond Traders Association, Mr Fred Mweni, said that it was expected that the coupon rate would be lower given the falling yields at the secondary market in the last few months.

“The interest rates on the secondary market have drastically come down from 13.85 per cent in March 2009 to 12.5 per cent on September 2009 to 9.75 per cent today,” said Mr Mweni.

In the 2008/9 budget, the government removed the 15 per cent withholding tax for investment in government bonds.

A similar incentive was extended to corporates and other institutions doing infrastructure projects such that the tax came down to 10 per cent on interest arising from long-term bonds of 10 years maturity and above.

The expected coupon rate of the coming bond could be as low as 9.75 per cent which is much lower than the 12.0 per cent coupon rate of the second issue.