The National Treasury has reopened two infrastructure bonds (IFBs) for its August 2024 issuance, looking to get back on track in its 2024/2025 domestic borrowing programme following undersubscription seen in July’s bond sale.
The State is seeking a total of Sh50 billion from the 17-year IFB that it first floated in March last year, and a 6.5 year IFB first issued in November 2023.
Infrastructure bonds have traditionally received higher investor interest compared to ordinary bonds due to their tax-free status, which remains in place after the cancellation of the Finance Bill 2024 which was proposing to introduce a five per cent withholding tax on these securities. The 17-year bond, which has 15.7 years to maturity, carries an interest rate of 14.39 per cent set in the initial auction, while the 6.5-year option (5.8 years to maturity) has a coupon of 17.93 per cent.
In its initial sale, the 17-year paper raised Sh50.87 billion against a target of Sh50 billion, with a subsequent tap sale that targeted Sh20 billion netting Sh12.7 billion. This marked a rare instance of an infrastructure bond failing to hit its overall target.
On the 6.5-year option, the initial sale last November netted Sh67.1 billion against a target of Sh50 billion, and its tap sale that sought Sh20 billion raised Sh47.9 billion.
The reopening of the two bonds comes against a background of a standoff between the Central Bank of Kenya (CBK) and investors over interest rates amid the government’s deepening fiscal hole.
Earlier this month, the rate standoff saw investors offer the State just Sh487.5 million in a tap sale of a two-year bond against a target of Sh20 billion.
A separate sale of reopened 10 and 20-year papers two weeks ago that targeted Sh30 billion raised bids worth Sh14.68 billion, out of which the CBK took up Sh9.76 billion.
The undersubscription by 50 per cent on the two papers and an earlier apathy on the tap sale was blamed by analysts on a lack of clarity on fiscal borrowing targets and a holdout for higher rates in the short term.
At the same time, CBK’s subsequent rejection of a third of the bids on the reopened bonds showed that it remains unwilling to accommodate expensive offers in the name of meeting the borrowing target.
Investors have turned to the 91-day Treasury Bill as they wait to see where rates settle — a factor that could work against the 17-year IFB, which is also weighed down by its lower coupon rate.
In the week’s T-bill sale, the 91-day paper raised bids worth Sh25.8 billion versus a targeted Sh4 billion, accounting for the lion’s share of the total of Sh31.6 billion that was offered for all three T-bill tenors.
