Treasury opens first early domestic bonds buyback

The sale of the infrastructure bonds —14-year and 17-year papers— closes on February 12, with February 17 set as the settlement date for successful bids.

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The Treasury has announced the first ever buyback of domestic Treasury bonds, targeting a partial early retirement of Sh50 billion on three papers that are due to mature in April and May this year.

This buyback also marks a change in strategy for the government, which had initially intended to refinance two of the bonds through a switch issuance, which would offer the holders alternative bonds as a rollover option.

The papers targeted in the buyback are a three-year bond which was first issued on April 11, 2022, a five-year bond sold on May 11, 2020 and a nine-year infrastructure bond whose debut sale was on May 23, 2016.

The three-year paper is set to mature on April 7, the five-year on May 5, and the infrastructure bond on May 12.

The combined outstanding value of the three bonds is Sh185.05 billion, meaning that the government is looking to buy-back 27 percent of the face or par value of these papers.

“Participation in the auction is on a voluntary basis and investors may opt to sell-back part or the entire holding (face value) in the bond(s),” said the Central Bank of Kenya (CBK) in a prospectus for the buyback.

In the initial switch bond plan, the government was targeting the same three- and five-year bonds, and an early maturing portion (amortisation) of a nine-year infrastructure bond which was issued in 2020.

The now abandoned switch issuances were to be done in November 2024 and January 2025, eyeing a total of Sh204.5 billion. While this is the first domestic buyback of a bond, the government has already used the tool on external debt, where in February 2024 it bought back a $1.5 billion portion of the $2 billion, 10-year Eurobond which was due to mature in June 2024.

This Eurobond buyback, which was financed using the proceeds of a new Eurobond or sovereign bond issuance of $1.5 billion, enabled the Treasury to address market jitters over its ability to repay the original loan.

To fund the domestic buyback, the Treasury is expected to lean on the proceeds of the ongoing sale of a pair of reopened infrastructure bonds, whose target is Sh70 billion.

The sale of the infrastructure bonds —14-year and 17-year papers— closes on February 12, with February 17 set as the settlement date for successful bids.

Meanwhile, the buyback is closing on February 17, and the payments being done on February 19, meaning that the government will have received the proceeds of the infrastructure bond sale by the time it is paying those who have agreed to the buyback.

Domestic debt maturities are usually funded by rolling over the debt via new bond issuances, and rarely through repayments from tax collections since the government is already running a budget deficit.

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