Kenya’s National Treasury is seeking to borrow KSh50 billion from the domestic market for budgetary support by re-opening a 20- year bond issued in 2018 alongside a new one of 15 – years (FXD1/2020/15 and FXD1/2018/25).
The coupon rate for the 15-year tenor will be market-determined at the auction that will be held Wednesday 19th February 2020.
Currently, the weighted average life of the fixed-rate bonds (domestic government bonds excluding infrastructure bonds) is 7.53 years.
“Thus, the rationale behind the dual-tranche February primary bond issuance is to lengthen the domestic debt maturity profile. Specifically, maturities of 15-year account for 7.6% of total fixed-rate bonds while the longer 23.3-year maturity contributes a paltry 0.3% to the segment,” says Churchill Ogutu, Senior Research Analyst at Genghis Capital.
Although market liquidity has remained adequate ahead of the auction, it is mainly concentrated at the short-end of the curve and funding the apex bank’s open market operations.
Therefore, market sentiment is not towards positive uptake (bids at or above Ksh 50.0Bn) of the bond offer.
“Despite the unpopularity of the tenors (15 and 23 years), the papers may be a good source of income especially at a time when margins on loans are being compressed by a reduction in the CBR, causing some hemorrhage to banks’ expected earnings. It’s worth noting that a considerable proportion of the loan portfolio is still under the CBR+4% lending terms.
While the search for yield and/or income may support demand for the papers, successfully raising the entire Ksh 50 billion may be onerous unless at considerably favorable yields. Risks from fiscal policy amidst skepticism on the government’s commitment to substantially cut the deficit will continue to invite a higher premium on the sovereign. However, with the fiscal authority on course with its local borrowing, the pressure to raise yields materially is unlikely,” notes NCBA Analysts – Faith Atiti and Stephanie Kimani.
The historical 3-year average on the 15-year is 12.92%. Currently, the yields on the 15-year and 23-year are at 12.57% and 13.18%, respectively.
The bond will be listed on the Nairobi Securities Exchange (NSE). Investors with active CDS Accounts are eligible.
Secondary trading in multiples of KSh50,000 will commence on Tuesday, February 25, 2019.