Bids for Kenya’s 15-year Infrastructure Bond Ends Tuesday

Kenya plans to sell a 15-year infrastructure bond (IFB) to raise up to $296 million this October to fund road, water and energy projects, according to the Central Bank of Kenya.

CBK says the bond will have a 12 percent coupon lower than the yield of the bonds offered last month, which stood at 15 percent.

The bids for the bond end on Tuesday (October 18) and will auction the paper on October 19.

Analysts from Genghis Capital Ltd  note that this is the longest IFB to date.

“It’s expected to see huge subscriptions driven by both local and foreign investors chasing tax exempt risk free yields. This will be the second IFB of the year with the previous IFB showing good liquidity and flows in the market. Weighted average yield expectations are between 12.75% – 13.50%, with the cutoff not expected much higher than that,”  reads their Interest Rate Update for October.

“With no shocks expected in the near term, this bond promises to spur secondary market trading and set new resistance levels on the benchmark bonds,” it adds.

In September, the government floated 5-year and 20-year Treasury bonds worth 248 million dollars for budgetary support, and ended up receiving bids worth 558 million dollars.

Cytonn Investments, note that the bond has a weighted tenor of 11.25 years after adjusting for partial redemptions, and a similar taxable bond with the same tenor is currently trading at a yield of 12.9%.  “We recommend to investors to bid at a yield of between 11.7% and 12.3%.”

According to Bloomberg, yields on the 5-year and 10-year bond were stable week on week at 4.5% and 7.2%, respectively. Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.3% points and 2.5% points, respectively for the 5-year and 10-year bond, on account of improving macroeconomic conditions.

Uptake of the bond, which will be listed at the Nairobi Securities Exchange and will start trading on Oct. 25.

According to Cytonn, the government is ahead of its domestic borrowing for this fiscal year having borrowed Kshs 108.9 bn for the current fiscal against a target of Kshs 70.6 bn (assuming a pro-rated borrowing throughout the financial year of Kshs 229.6 bn budgeted for the full financial year).

Reuters on Monday reported that the Kenyan shilling was steady against the dollar on Monday and was seen supported by portfolio investors looking to buy government debt.

Last week, the Kenyan Shilling closed at Kshs 101.4 from Kshs 101.3, previously, on account of demand by importers in the energy sector being matched by dollar inflows from offshore investors participating in government treasury auctions.

The Budget for Financial Year (FY) 2016/17  is estimated at Kshs 2.3 trillion 2015/16 fiscal year budget, with recurrent expenditure at Kshs 850.3 billion and development expenditure at Kshs 809.0 billion, representing 11.5 percent and 10.9 percent of the GDP.

The Energy, Infrastructure and ICT sector’s share of the budget increased by 4 percentage points, growing from 26.9 percent to 30.4 percent, the largest increase for any sector.

Kenya’s Current inflation increased 6.34 percent year-on-year in September of 2016, following a 6.26 percent rise in August.

To fund the budget, treasury plans to raise Kshs 1.37 Trillion from domestic tax collection which shall be achieved by broadening the tax base and improving revenue administration through simplified and modernized VAT legislation.

Treasury projects a budget deficit amounting to KSH 398.1 billion with an aim of bringing it below 4 percent of the GDP. This deficit is expected to be funded by domestic borrowing amounting to KSH 223 Billion and external borrowing of Ksh 4 billion; with KSH1.5 trillion being generated by the Kenya Revenue Authority.

Read: Overall Treasury Bills Subscription Reduces to 154.6 Percent