The Central Bank of Kenya (CBK) is seeking to raise Sh45 billion from three reopened bonds amid a push to lower the government’s cost of borrowing by reissuing older bonds that offer coupons that are lower than prevailing yields.
The three bonds being reopened are a 15-year paper whose initial sale was in April 2022, a 10-year paper first sold in February 2023, and another 10-year paper which was first floated in March this year.
The 2022 and 2023 papers will be on sale until November 6, looking to raise Sh25 billion, while the sale of the 2024 paper, which is targeting Sh20 billion, will close on November 13.
In reopening the three papers, the government is keeping to its recently published annual borrowing plan for the 2024/2025 fiscal year, which showed that it will be leaning on reopened papers, rather than new issuances.
The borrowing plan for the first time included a bond issuance calendar, which indicates that the bulk of upcoming bond sales will carry a tenor of between 10 and 20 years.
The reopening of older, longer-dated bonds will allow the Treasury to keep coupon rates relatively low, while also lengthening the maturity profile of domestic debt. The coupon on the 15-year 2022 bond stands at 13.94 percent, while that of the 2023, 10-year tranche is 14.15 percent. The 10-year 2024 paper meanwhile carries a coupon of 16 percent.
Current secondary market yields for medium-term bonds are about three percentage points higher than the bonds’ coupons, showing that investors are still demanding a premium to lend to the government.
The rate of return earned by investors does not have to match the coupons since the CBK offers discounts when a lower-yielding security is reopened in a high-interest-rate environment.
The bond discounts serve to lift the effective rate of return since the interest is paid on the face value of the bond and an investor will also be paid the full principal at redemption despite paying a lesser amount when buying the bond due to the discount.
The bond issuance calendar also shows that the government will issue a switch bond next month, targeting a three-year bond and a nine-year infrastructure bond which were sold in April 2022 and April 2020 respectively, and which both mature in April 2025.
This switch bond will seek to refinance maturities of Sh100.1 billion and is expected to have a maturity period of between five and 10 years.
A switch bond issuance involves the direct conversion of maturing Treasury bills and bonds into longer-term security, cushioning the exchequer from a liquidity crisis on account of refinancing heavy short-term maturities.
A second switch bond, also carrying a tenor of between five and 10 years, will be rolled out in January 2025 to retire a five-year bond that was floated in May 2020, whose outstanding amount is Sh104.5 billion.
The Treasury floated its first-ever switch bond in June 2020, offering investors a six-year infrastructure paper in exchange for a maturing one-year Treasury bill that the State was looking to roll over. This swap netted Sh20.2 billion out of a target of Sh25.6 billion.
The next switch bond was sold in December 2022, offering a six-year infrastructure bond in exchange for maturing Treasury bills and a two-year bond. It raised Sh47.8 billion against a target of Sh87.8 billion.
