Kenyan Government Seeking To Issue a 12-Year Amortized Infrastructure Bond

The Kenyan government is seeking to issue a 12-year amortized Infrastructure Bond (IFB 1/2017/12) with an effective tenor of 8.8 years and a coupon of 12.5 percent in a bid to raise 30.0 billion shillings for partial support of infrastructural projects in the roads, energy and water sectors.

According to economic analysts, given that:

• the government has only borrowed 45.8 billion shillings from the foreign market against its foreign borrowing target of 462.3 billion shillings, and
• the Kenya Revenue Authority (KRA) has already missed its first half of 2016/17 fiscal year revenue collection target by 10.6 percent, and therefore expected to miss its overall revenue collection target of 1.5 trillion shillings for the current fiscal year,

Financial experts such as Cytonn Investments expect that the two reasons mentioned above will result into an upward pressure on interest rates and investors are likely to demand premium in this auction issued by the government.

The bond has a weighted tenor of 8.8 years after adjusting for partial redemptions, and a similar taxable bond with the same tenor is currently trading at a yield of 13.7 percent in the secondary market. Cytonn Investments in its recommendation bid recommends investors to bid at a yield of between 13.50 percent and 14.25 percent.

According to Bloomberg, the yield on the 5-year and 10-year Eurobonds increased by 20 bps and 10 bps w/w to 4.3 percent and 7.2 percent from 4.1 percent and 7.1 percent respectively as witnessed during the previous week.

Since the mid-January 2016 peak, yields on the Kenya Eurobonds have declined by 4.5 percent points and 2.4 percent points, respectively, for the 5-year and 10-year bond due to improving macroeconomic conditions. This is an indication that Kenya remains an attractive investment destination.