Government Re-opens A 15-Year Bond With 5.4 Years’ Tenor

The Kenyan Government has re-opened a 15-year bond with an effective tenor of 5.4 years, to raise 30.0 billion shillings for budgetary support.

In the last two auctions, the government rejected expensive bids from investors, given that they are ahead of their domestic borrowing target and hence under no pressure to borrow expensively.

However:

• The government has only borrowed 45.8 billion shillings from the foreign market against its foreign borrowing target of 462.3 billion shillings.
• The Kenya Revenue Authority (KRA) has already missed its first quarter of 2016/17 fiscal year revenue collection target by 18.4 percent and is also expected to miss its overall revenue collection target of 1.5 trillion shillings for the current fiscal year.

Given that:

• A 5-year bond is currently trading at a yield of 13.4 percent in the secondary market, and
• There is skewed liquidity currently being witnessed in the market, we expect investors to bid for the bond at yields above the secondary market yield, at a bidding range of 13.6 – 14.5 percent.

According to Bloomberg, the yield on the 10-year Eurobond increased week on week by 10 bps to 7.4 percent, from 7.3 percent the previous week, whereas that of the 5-year Eurobond increased week on week by 20 bps to 4.4 percent from 4.2 percent the previous week. The increase could be a reflection of the increased perceived risk levels as the country heads into an election in August last year.

Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 2.2 percentage points and 4.4 percentage points for the 5-year and 10-year bond, respectively, due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.