Taxpayers have incurred a cost of Sh7.3 billion as an incentive offered to investors for early buyback of two existing Eurobonds and issuance of longer-term replacement bonds to fund it.
The incentives are a price discount to investors who bought the country’s $2.25 billion (Sh290.3 billion) bond last week and a premium offered in the buyback of $500 million (Sh64.5 billion) from owners of the debt.
Kenya will receive Sh4.1 billion less on the Sh290.3 billion following the discount offered to investors who had sought higher returns for the Eurobonds sold last week
It also gave investors a premium of Sh3.2 billion for giving up two existing bonds, with one of $350 million (Sh45.2 billion) due in 2032 and another $150 million (Sh19.4 billion) maturing in 2028.
These are the hidden costs of the buyback deal, which has seen Kenya issue more Eurobonds to pay off maturing debt and smooth its repayment schedule.
The government issued two Eurobonds in February and October last year to buy back bonds that were falling due after concerns about Kenya’s ability to pay off a June 2024 bond sent yields sharply higher and hit the shilling.
The new bonds, whose sale closed on Friday, are a seven-year note of $900 million (Sh116 billion) with an annual interest rate of 7.875 percent, and a 12-year paper which raised $1.35 billion (Sh174.5 billion) at a coupon of 8.7 percent.
Investors had asked the government for returns of 8.1 percent for the seven-year paper and 8.95 percent for the 12-year tranche.
In order to agree to the lower returns (coupons), the investors are paying 98.819 percent of the face value of $1,000 per bond unit for the seven-year paper and 98.182 percent for the 12-year paper.
This price discount means that the government is receiving $988.19 (Sh127,496) on the seven-year option, and $981.86 (Sh126,679) for the 12-year paper for every bond unit—translating to a discount of Sh4.16 billion ($32.27 million).
On the partial buyback, the State is targeting $350 million (Sh45.2 billion) on a 12-year bond maturing in 2032, and $150 million (Sh19.4 billion) on a 10-year bond that falls due in 2028.
Kenya is offering a price premium on the face value to encourage holders of the targeted bonds to agree to their early retirement.
The government has priced the offer at $1,055 per principal bond unit of $1,000 for the 12-year paper and $1,035 for the 10-year bond.
These prices represent premiums of 5.5 percent and 3.5 percent, which is compensation for the amount investors would have earned for holding the papers to maturity.
For the 12-year bond, this premium translates to an additional outlay of $19.25 million (Sh2.48 billion) for the government and $5.25 million (Sh677.36 million) on the seven-year bond.
“It is common practice for countries issuing new bonds and buybacks to offer these discounts and premiums on the price,” said Churchill Ogutu, an economist at IC Group (Mauritius).
“In the sovereign bond market, investors come to the table with their preferred yield, with the seller having to adjust their prices via discounts if they want to settle at a lower coupon.”
There is an inverse relationship between bond prices and yields in the secondary market, where an increase in one results in a fall in the other.
The proceeds of the new bond will be used to settle the buyback, which closes on February 26.
In bond sales, the issuer offers discounts on the face or par value of a paper as an incentive to entice buyers to participate in the issuance.
The discount acts as compensation where the bond’s payable interest rate is lower than the yield requested by investors, with the lower price making up for the returns the investors are leaving on the table by accepting the lower interest rate.
On the other hand, the buyback premium represents the cost the taxpayer is incurring to retire the bonds earlier than their due date.
The higher prices also serve as partial compensation for the interest that the bondholder is foregoing by agreeing to let go of their asset before maturity.
The government will also pay the bondholders accrued interest on the bonds, which is the amount of interest that they have earned since their most recent semi-annual interest payments in August and November 2025.
For the Treasury, the rush to refinance future maturities early is part of efforts to avoid a repeat of the situation in early 2024 when doubts over Kenya’s ability to repay a $2 billion 2014 Eurobond spooked the forex market, sending the shilling to its all-time low rate of Sh161 to the dollar.
After refinancing the 2014 bond using a new issuance, the government identified the mid-2030s as a period of relatively sparse maturities, hence the move to push forward near-term maturities into this period.
In addition to the discount given to investors, the government pays out the commissions due to the global banks that arrange these kinds of transactions. These fees are usually deducted from the gross proceeds of a bond sale, or directly from the exchequer in the case of a buyback.
In the buyback transaction, Kenya appointed Citigroup Global Markets Limited of the US and Standard Bank of South Africa as the joint dealer managers, with Citibank London branch acting as tender agent.
For a Eurobond sale, appointed selling agents, or book runners, first assess the market for demand and pricing levels, arriving at a predetermined yield based on the feedback from the professional investors who participate in such offers.
Depending on the actual demand raised when the bond sale opens, the government and its agents can then opt to set a lower coupon on the bonds, hence the difference between this rate and the earlier determined yields.
The government and London Stock Exchange are yet to publicise last week’s bond sale’s prospectus, which lists a deal’s arrangers and at times the fees they charge for handling the offer.
The previous Eurobond sale in October 2025, which raised $1.5 billion (Sh193.5 billion), had Citi and Standard Bank as the joint book runners.
