Seven-year infrastructure bond oversubscription eases cash jitters

The Central bank of Kenya, Nairobi. FILE PHOTO | DENNIS ONSONGO | NMG

The nearly four-time oversubscription of the seven-year infrastructure bond has eased cash crunch concerns in government with only days to the end of the 2022/23 fiscal year.

The tax-free bond, which attracted Sh220.5 billion in investor bids against a target of just Sh60 billion, posted a performance rate of 367.5 percent — a record outturn contrasted to any previously issued infrastructure bond at primary issuance, going as far back as October 2014, according to Central Bank of Kenya (CBK) data.

Proceeds from the bond have been split to cover Sh174.2 billion in new borrowing and Sh39.2 billion in redemptions covering the financial year to June 30.

The nettings will bring the Treasury closer to its domestic borrowing target amid what has been a tough-going programme, depressed by investor apathy to previous bond issues.

According to the Treasury data total receipts from domestic borrowing, inclusive of redemptions, stood at Sh406.6 billion as of the end of April against a target of Sh886.5 billion for the fiscal year, leaving behind a gap of Sh479.9 billion, which was to be plugged in just two months.

Analysts had widely expected the bond to be oversubscribed based on its tax-free nature, rising yields and attractive tenor with the bond's effective time to maturity standing at 5.6 years.

The high interest in the paper has, however, come as a surprise to analysts with the subscription rate beating many of their expectations.

"The magnitude of the subscription, however, was surprising as this was the highest ever recorded in a Kenya government domestic bond issue. Also notable is that 92 percent of the Sh213.4 billion in accepted bids or Sh196.3 billion were competitive, showing that investors well aware of the huge domestic borrowing deficit were willing to test the resolve of the CBK by bidding aggressively in this auction," said analysts at Sterling Capital.

The increased domestic borrowing has come at a premium with the weighted average rate of accepted bids standing at 15.837 percent.

According to analysts at Sterling Capital the high yield on offer, which stands against a low effective tenor points to continued bond sell-offs in the secondary market, which will lead to lower bond prices.

Rising yields in the secondary market are expected to prompt investors to demand even higher yields from bonds at primary issues resulting in higher interest rates on securities in the near term.

According to Solomon Kariuki, a research analyst at AIB-AXYS Africa, the government has surrendered to the demand for higher interest rates as it faces more pressure in plugging its funding deficit at present.

“If you look at the last five years, the government has continuously looked to kick the can down the road and by doing so, this shows the priority is to take care of the now,” he said.

The Central Bank of Kenya (CBK) is widely expected to return to the market with a tap sale to the infrastructure bond in a bid by the government to mop up available liquidity from the money markets.

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.