The Central Bank of Kenya (CBK) seeks to raise Sh70 billion from two re-opened infrastructure bonds in February.
The bank which serves as a fiscal agent of the National Treasury has issued its prospectus for the re-opened infrastructure bonds covering 14 and 17-year papers in the auction which runs until February 12.
The re-opened 14-year paper (with 11.8 years left to maturity) has a coupon rate of 13.9380 percent while the longer dated 17-year issue (15.1 years to redemption) will see investors lock in a return of 14.399 percent.
Both bonds have an amortised redemption structure where 50 percent of the outstanding principal will be paid off on November 4, 2030 for the 14-year paper and February 28, 2033, for the 17-year paper.
The auction is expected to determine the price to be paid by buyers of the re-opened bonds whose interest income is exempted from withholding taxes. Other bonds attract withholding taxes of five or 10 percent depending on their duration.
Bond prices are set at a premium or discount to the par value of Sh100 per unit of the papers and have an inverse relationship to the bond’s fixed interest rate or coupon.
The 17-year paper for instance has an implied yield of 14.2 percent based on the traded yield at the Nairobi Securities Exchange (NSE) on Wednesday and a clean price of Sh101.03 per unit.
This implies that investors purchasing the paper will likely pay a premium price to the par value to lock in the higher 14.399 percent coupon with interest rates in the secondary market having fallen below the coupon rates of the previously issued infrastructure bonds.
The prices of infrastructure bonds in the secondary market have soared amid falling interest rates, increasing the demand for the papers.
The tax-free nature of infrastructure bonds is set to raise the attractiveness of the papers to investors, allowing the exchequer to stay ahead of its domestic borrowing programme for the fiscal year running to June 30.
CBK’s previous infrastructure bond issuance was more than two-times oversubscribed with bids totaling Sh126.3 billion on re-opened 6.5- and 17-years’ papers against Sh50 billion on offer.
Bids on the two-reopened infrastructure bonds are widely expected to remain outsized with members of parliament having rejected a proposal to introduce a new five percent withholding tax on interest earned from infrastructure bonds.
The exchequer had achieved 48.7 percent of its gross domestic borrowing target for the 2024/25 fiscal year with receipts of Sh477.1 billion against a target of Sh978.2 billion in six months through to December 2024.
