Interest rate demands by investors in the June infrastructure bond are likely to exceed the 15 percent mark, fixed income analysts say, in what promises to test the government’s resolve of keeping a lid on borrowing costs in a period of fiscal strain.
The Sh60 billion offer, whose sale closes on Wednesday, is expected to attract healthy investor appetite due to its tax-free status and a relatively short tenor of seven years.
Investment banks normally recommend bid ranges for clients, striking a balance between optimising returns and avoiding rejection of the bids by the Central Bank of Kenya (CBK) on account of being too expensive.
For the June bond, Genghis Capital has recommended bid levels of 14.9 and 15.1 percent, while AIB-AXYS Africa’s bidding guidance is between 15 and 15.49 percent.
Meanwhile, analysts at Sterling Capital said in a note they expect bids to come in at between 15.29 and 15.69 percent for the bond which is the final issuance of the current fiscal year.
“We foresee aggressive bidding and an over-subscription in the June 2023 auction…the issuance hits a trifecta for a bulk of investors, namely short tenure, the ability to lock in attractive coupons at premiums against the yield curve, and the tax incentive,” said Genghis Capital.
The infrastructure bond sale is coming in a period when the government looks set to fall short of achieving its revised domestic borrowing target of Sh438.1 billion, having netted just 56 percent of this amount by the end of last month.
The lack of new borrowing, combined with high debt service obligations, saw the government delay the payment of civil service salaries in March.
The struggles by the Treasury to raise funds domestically in recent months have also led to a rise in interest rates on both Treasury bills and bonds, with tough borrowing conditions in the external markets –save for concessional lending by the IMF and World Bank—also boxing in the government.
The rate on the 91-day Treasury Bill has now risen to 11.4 percent, from 7.8 percent a year ago, while those on the 182-day and 364-day papers have gone up from nine and 9.9 percent respectively to 11.5 and 11.6 percent in the period.
In bond sales, investors extracted a rate of 14.4 percent from the government in the most recent infrastructure bond sale—of March 2023— which remains the highest the State has ever paid for this type of bond.
This points to similar elevated rate demands by investors in the June issuance, analysts say.
“Debt service still remains high which combined with a wide budget deficit so close to the end of the fiscal year, point to the CBK’s likely acceptance of aggressive investor bids in this auction,” said analysts at Sterling Capital in their June fixed income review.
In the year starting July, the domestic market (Sh521.5 billion) is expected to shoulder the burden of financing the budget deficit of Sh720.1 billion, with the bulk of external borrowing going towards rolling over the maturing $2 billion (Sh278.7 billion) Eurobond.
