The Central Bank of Kenya (CBK) has mopped up nearly Sh100 billion from the financial markets since March, potentially shrinking liquidity for the current infrastructure bond.
Sterling Capital, a Nairobi-based investment bank, said in a report that the decline in liquidity would likely lead to lower subscription for the Sh60 billion infrastructure bond (IFB).
Already, the decline in cash available in the market has led to lower trading in the Nairobi Securities Exchange (NSE) as bond turnover has been constrained in the past two months.
“Market liquidity has declined significantly since the last IFB issue (in March) thanks to CBK repurchase agreements (repos) that have mopped up close to Sh100 billion in market liquidity. This together with the magnitude of the current issue is likely to have an impact on its subscription rate,” said Sterling Capital.
The investment bank went on to say that CBK action had resulted in a significant reduction in secondary market trading activity in September, adding it expects the impact to continue into this month.
The coupon for this issue will be market determined, while returns shall not be subjected to tax, a feature of the bond designed by the Treasury as the major attraction to investors.
Both Sterling Capital and Standard Investment Bank (SIB) estimate that the average yield for the bond will be 12.20 percent or slightly above that.
“In terms of expected yields on the issues, we predict the weighted average rate of bids at between 12.20 and 12.50 percent and a weighted average rate of accepted bids at between 12.20 and 12.30 percent,” said Sterling Capital.
“Our expectation of the average is between 12.20 and 12.35 per cent,” said SIB.
Sterling Capital said the amount was the highest ever floated by the Treasury in a single IFB issue, highlighting the State’s need for cash to bridge the perpetually wide fiscal deficit. The investment bank said the government was behind in terms of revenue receipts, which indicates the need for the higher amounts to be raised from bonds.
“On government accounts we see the National Treasury slightly behind our linear required run rate estimate for receipts after the first two months of the fiscal year,” said Sterling Capital.