Capital Markets

February bond to pay 13pc interest rate

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The Central bank of Kenya, Nairobi on Tuesday, January 5, 2021. PHOTO | DENNIS ONSONGO | NMG

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Summary

  • Results of the bond offer published by the Central Bank of Kenya (CBK) on Wednesday shows that investors offered the government Sh132.26 billion on the 19-year paper that had targeted Sh75 billion.
  • The CBK took up Sh98.64 billion at an average rate of 12.965 percent, beating the 12.74 percent yield of the most recent IFB issuance in September 2021.
  • The September paper had raised record bids of Sh151.26 billion, out of which the government took Sh106.75 billion.

Investors in the February infrastructure bond (IFB) will be paid an average tax-free interest of 12.965 percent on the paper, making it the most lucrative security the government has issued in recent years.

Results of the bond offer published by the Central Bank of Kenya (CBK) on Wednesday shows that investors offered the government Sh132.26 billion on the 19-year paper that had targeted Sh75 billion.

The CBK took up Sh98.64 billion at an average rate of 12.965 percent, beating the 12.74 percent yield of the most recent IFB issuance in September 2021, and also making it the highest rate on an infrastructure paper that is yet to mature.

The September paper had raised record bids of Sh151.26 billion, out of which the government took Sh106.75 billion, underlining the massive performance advantage the infrastructure bonds draw from their high return and tax-free status.

Analysts had projected the paper to be oversubscribed significantly, going by past trends and a liquid money market at the time of sale.

“Our expectation is the debt issue will be oversubscribed as the attractive tax free yield as well as capital appreciation potential appeals to diverse investor segments,” said Sterling Capital in its pre-auction note on the bond.

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

A 20-year bond issued last August and reopened last month (matching it closely in tenor to the February 2022 IFB) carried a coupon of 13.44 percent before tax, meaning that its net yield would be around 12.09 percent.

This tranche raised Sh27.6 billion in the January reopening, and Sh43.5 billion when it was first sold last August.

The performance of the February infrastructure bond will also help the Treasury stay ahead of its domestic borrowing target, currently set at Sh616.8 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, currently at about nine years.

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