The Treasury is considering setting up a fund that would ease repayments of its long-dated securities at maturity as one of the measures to mitigate risk associated with large redemptions.
The sinking fund is revealed in a Draft Debt Policy and Borrowing Framework currently being reviewed before an implementation date is set. The fund would mean the Treasury sets aside money and avoids having to allocate a large amount at the due date of the securities.
Treasury faces major maturities in the coming months, especially in April, that risks affecting liquidity in the money market as well as the exchange rate.
Towards the end of last year, the Treasury contemplated raising finances internationally, but it now appears to have gone slow on the matter.
Other debt mitigation measures that the policy sets out are buy-backs, changing the fixed-rate into floating-rate debt and vice versa as well as swapping the currency denomination of old debt.
“In the effort to manage cost and risks, the National Treasury shall employ the use of various liability management tools … These tools may include; a) debt restructuring including debt securities buy backs, switches and exchanges, b) transforming fixed rate debt into floating rate debt and vice versa c) changing or swapping the currency denomination of old debt d) use of a sinking fund to retire expensive debt,” reads the paper.
The other major advantage of a sinking fund is the reduction in interest rate that an issuer pays due to the fact that the risk of default is drastically cut down. Investors perceive the issuer to be less risky and are therefore willing to be paid less because the State has set aside money for paying them at the end of the period for the security.
“In the endeavour to implement the above-mentioned liability management tools, the National Treasury may transact in derivative transactions as prescribed in the relevant laws and Regulations and in accordance with best practices benchmarked to the debt management offices of other governments that are internationally respected for their practices,” says the policy.