Infrastructure Bond Offer No IFB1/2015/12 Performance Improves

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By end February 2015 the Central Bank of Kenya (CBK) raised KES 461.90 billion against maturities of KES 395.08 billion resulting in cumulative borrowing of KES 66.92 billion; this was a gradual improvement from KES 55.03 billion raised in the previous month. The positive uptake of net new borrowing was mainly attributed to high subscriptions of bond issues in the month of February 2015. The borrowing target for FY 2014/2015 still remains at KES 101.7 billion; however, the Treasury has proposed to extend the target to KES 144.8 billion.

This is based on grounds of revenue underperformance in the first half of the FY which has resulted in a shortfall of KES 17.8 billion, additional expenditures amounting to KES 61.7 billion as well as sovereign bond tapping of KES 66.8 billion; culminating to additional domestic borrowing of KES 46 billion. Increased borrowing in the domestic market raises concerns of a distortion in the market given that the treasury remains with a short time frame to gear borrowing before the end of the FY 2014/2015.

Amortized 12-Year IFB will minimize potential refinancing risk

The IFB1/2015/12 is the first infrastructure bond to be issued in 2015, aiming to raise KES 25 billion in the first tranche this month followed by a tap sale of another KES 25 billion in the month of April. The funds from the offer will be used to support funding of infrastructure projects in Transport (medium term)- KES 20 billion, Transport (long term) – KES 19.12 billion and Energy – KES 10 billion. IFBs have proven popular among foreign as well as local investors as they are tax free; the previous IFB/2014/12 was oversubscribed by 158.47% at an attractive yield of 11.263%. The amortization feature will favour the current maturity structure of the bond portfolio and will effectively minimize potential refinancing risk. The feature also makes it more attractive for investors as they will receive the same coupon level for different periods during the life of the bond.

Where do we expect the subscription rate to fall?

The bond market has seen a strong appetite for medium term papers since 2014, and the IFB will meet various investor horizons as previous issues have been actively traded in the secondary market providing an easy entry and exit for investors, therefore oversubscription is highly likely. Moreover, the maturity of the FXD2/2013/2 in March improves the prospects for the offer as investors will have an opportunity to rollover to a longer dated bond.

Where do we expect the yield to fall?

We expect the yield on the IFB1/2015/12 to fall within a range of 11.25% to 11.55% with high subscription levels based on high liquidity levels in the money market. With inflation currently holding steady at 5.61% recorded in February, we do not expect any pressure on yields.

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