The government has been forced to open a Sh50 billion tap sale of the oversubscribed August infrastructure bonds after the entire Sh95 billion that was realised in the issuance was gobbled up by a repayment of a maturing two-year bond.
The tap sale opened on Tuesday and will run until Thursday, but could close earlier once the Central Bank of Kenya (CBK) hits the targeted amount. The allotment of bids is on a first-come, first-served basis, the CBK said.
The primary sale, which targeted Sh90 billion, ran between July 21 and August 13. It comprised a pair of reopened 15-year and 19-year infrastructure bonds first sold in January 2018 and February 2022 at coupon rates of 12.5 percent and 12.96 percent, respectively.
The auction raised Sh95 billion from record bids of Sh323.43 billion, with the 15-year paper offering a yield of 12.99 percent and the 19-year 13.99 percent, at discounted prices of Sh98.19 and Sh94.59 per bond unit of Sh100, respectively.
These prices will also apply to the tap sale.
At the same time, there was a Sh94.68 billion maturity on August 18 of a two-year bond that was floated in August 2023, which effectively took up all of the infrastructure bond proceeds.
With the government under pressure to meet its high domestic borrowing target of Sh635.5 billion for the current fiscal year, a tap sale has therefore proved necessary to bring in new borrowing for the month.
“Overall, a tap sale is in the offing given elevated appetite and pressure on debt service into the fourth quarter of the year, prompting scaled-up efforts to front-load local borrowing,” said analysts at NCBA in a weekly fixed income note, which was released before the announcement of the tap sale on Tuesday morning.
Bonds are retired via bullet payments upon maturity, meaning that the government has to either issue a follow-up paper to raise funds for the refinancing or dig deep into the Consolidated Fund for the payment.
August is a costly month for the government in terms of debt service, with total obligations of more than Sh350 billion.
In addition to the maturing two-year bond, Treasury is also paying Sh87.2 billion in interest on its portfolio of bonds and Sh83.4 billion in Treasury bill maturities this month.
Externally, its debt service charge for the month includes principal and interest payments of Sh41.6 billion to the Eastern & Southern African Trade & Development Bank, and Sh19.47 billion in semi-annual interest payments on Eurobonds worth a cumulative $3.5 billion (Sh452.3 billion) that were issued in February 2018 and February 2024.
In the 2025/2026 fiscal year, Treasury is spending Sh851.4 billion on domestic interest payments, Sh246.3 billion in foreign interest charges and Sh340.2 billion in external principal payments.
In addition to the debt service costs, the government has to borrow a net of Sh635.5 billion from the domestic market and Sh287.7 billion from external lenders in the year to fund a budget deficit of Sh923.2 billion.
