Capital Markets

Central Bank opens Sh75bn infrastructure bond sale

cbk

Central Bank of Kenya. FILE PHOTO | NMG

Summary

  • This is the second such paper following the February auction that raised Sh98.6 billion, surpassing the government fiscal agent’s target of Sh75 billion.
  • The new auction is also expected to record a high subscription due to the paper’s tax-free status besides the CBK’s tradition of paying relatively higher interest rates on such securities.
  • Interest on ordinary bonds is levied a withholding tax of between 10 and 15 percent, which significantly cuts the effective yield for investors.

The Central Bank of Kenya (CBK) is seeking to raise Sh75 billion from the sale of an 18-year infrastructure bond on which investors will not pay taxes on interest received.

This is the second such paper following the February auction that raised Sh98.6 billion, surpassing the government fiscal agent’s target of Sh75 billion. The bond came with a 12.96 percent tax-free interest, making it the most lucrative security the government has issued in recent years.

The new auction is also expected to record a high subscription due to the paper’s tax-free status besides the CBK’s tradition of paying relatively higher interest rates on such securities.

Interest on ordinary bonds is levied a withholding tax of between 10 and 15 percent, which significantly cuts the effective yield for investors.

The 18-year bond is on sale until June 7. The interest rate on the security will be determined by the market. Small investors will be repaid their principal earlier than those investing large sums.

The prospectus for the bond says 50 percent of the value of the bonds will be repaid on June 2, 2031, with investments of Sh1 million and below to be redeemed in full on that date.

The remaining portfolios will mature at the end of the 18 years on May 21, 2040.

The new bond comes at a time the stock market is registering a sharp decline, a move that could see the fixed income security benefit from investors fleeing to lock in guaranteed returns.

Infrastructure bonds have typically been oversubscribed by a large margin, with the CBK taking significantly more than the amount advertised in the prospectuses.

Such a paper sold in September last year had a 12.74 percent interest rate and attracted record bids of Sh151.26 billion, out of which the government took Sh106.75 billion.

The high subscription on the infrastructure bonds which are long-dated has also helped the government’s bid to lengthen the maturity profile of domestic debt.

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