Investors in Kenya’s $1.5 billion (Sh193.8 billion) Eurobond issued last week were given a discount of Sh4.3 billion on the face value of the securities as the government sought to keep the interest rate on the securities below the initial levels demanded by investors.
A discount on a bond represents the additional return an investor will get on redemption of the security, assuming the paper is held to maturity.
The bond was sold in two tranches of seven and 12 years, which raised $750 million each, at interest rates of 7.875 percent and 8.8 percent respectively.
A prospectus of the bond published on Tuesday by the London Stock Exchange (LSE), however, indicated that investors in the seven-year option paid 98.3 percent of the face value of their bonds, and those taking up the 12-year paper paid 97.13 percent.
In a bond sale where the coupon is lower than the yield requested by investors, an issuer offers a discount on price to make up for the returns the investors are leaving on the table by accepting the lower interest rate.
This price discount meant that the government received $983 (Sh127,034) for the seven-year and $971.30 (Sh125,521) for the 12-year paper for every bond unit of $1,000 — translating to a gross haul of $1.466 billion (Sh189.5 billion) against the issuance’s face value of $1.5 billion.
This means that the investors were given a total discount of $34.2 million (Sh4.3 billion) by the government in order to settle the difference between the coupon (actual interest rate on the papers) and the yields.
“All the liability management issuances done in the last two years have been sold at a discount,” said Churchill Ogutu, an economist at IC Group (Mauritius).
In addition to the discount given to investors, the government also pays out the commissions due to the selling banks and listing fees from the proceeds of the bond. Kenya appointed US lender Citi Group and South Africa’s Standard Bank as the joint book runners for this latest Eurobond issuance.
Fund managers said that in the case of the new Kenya Eurobond, the yields after the book building process had settled at 8.2 percent for the seven-year tranche and 9.2 percent for the 12-year option, while the coupons were eventually set at 7.875 percent and 8.8 percent respectively.
In a Eurobond sale, the 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 Kenyan bond raised bids worth $7.5 billion (Sh969 billion), giving the government room to pay lower interest compared to the yield that had been indicated during book building.
The seven-year, $1.5 billion Eurobond issued in February 2024 to partially refinance the $2 billion, 10-year 2014 bond also carried a discount for investors, who had demanded a yield of 10.15 percent compared to a coupon of 9.75 percent that the government settled on for the paper.
In domestic Treasury bond sales, the coupon is determined by the average rate on bids that the CBK accepts at an auction, with the price charged per bond unit of Sh100 determined by the difference between this interest rate and the average demanded by investors on their bids.
