The Treasury is looking to convert Sh87.8 billion worth of government securities that are due to mature in January into a medium-term infrastructure bond in order to avoid a cash crunch early in the New Year.
The direct conversion of maturing Treasury bills and bonds into longer-term security, which is known as a switch bond, has been done only once before by the Treasury, in June 2020.
Central Bank of Kenya (CBK), the government’s fiscal agent, said that it is primarily looking to roll over a maturing two-year bond issued in January 2021, from which Sh55.85 billion is due to be repaid to investors.
There are also three Treasury bills to be rolled over at the same time, comprising a 91-day paper for Sh10.97 billion, a 182-day T-bill worth Sh8.8 billion and a 364-day paper with a value of Sh12.19 billion.
Holders of all these securities are now being offered a chance to roll over their funds into a tax-free, six-year infrastructure bond, whose interest rate will be market determined.
The move by the new Treasury administration to roll over is seen by fiscal analysts as an effort to address the refinancing risk carried by these papers early in the new year, at a time when the government is playing catch-up with the domestic borrowing target for the fiscal year.
“The maturity is very early in January when the market will probably still be shrugging off the Christmas holiday lull, and liquidity may not be ample to properly retire these maturities. It’s a prudent move by Treasury officials to preempt and avert that risk at the earliest possible time,” said Churchill Ogutu, an economist at IC Asset Managers (Mauritius).
In June 2020, the switch bond was also in form of a six-year infrastructure paper, which netted Sh20.2 billion out of a target of Sh25.6 billion—the worth of a maturing one-year Treasury bill that the state was looking to roll over.
An infrastructure bond is deemed to be more attractive to entice the voluntary rollovers that are the basis of a switch bond.
In the case of the current offering, those taking up the switch option will also have the added advantage of getting a higher interest rate compared to their maturing holdings.
The 14-year infrastructure bond that was sold earlier this month paid investors a rate of 13.94 per cent, indicating the level of return that investors in the switch bond can expect to command.
The maturing two-year paper has been paying investors a rate of 9.48 per cent, while the Treasury bills carry yields of between 9.03 per cent and 9.44 per cent.
The interest returns from these papers are also charged a 15 per cent withholding tax.
This means that those rolling over their funds into the switch bond will enjoy close to twice their current returns should the yields of the paper match those of the November infrastructure bond.