State rejects Sh50bn as projects bond is 140pc subscribed

The entrance of the Nairobi-Naivasha SGR tunnel which begins from Em Bulbul in Ngong Town, south of Nairobi. The Treasury was seeking to raise from the 15-year infrastructure bond. FILE PHOTO | NMG 

By GEOFFREY IRUNGU

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Summary

• Central Bank of Kenya (CBK) acting director for financial markets John Birech said the new borrowing will be only Sh5.04 billion.
• The government was seeking Sh40 billion in a 15-year bond and was offering to pay investors 12.5 per cent as a coupon (interest) annually.
• The subscription of the infrastructure bond was a 139.39 per cent. The weighted average yield that investors were asking for stood at 13.026 per cent.

The Treasury is expected to reopen the recently floated 15-year infrastructure bond after rejecting costly bids.

In the auction results released on Thursday, the Treasury picked only Sh5 billion out of a possible Sh55.8 billion that investors subscribed for in the bond floated last week.

Central Bank of Kenya (CBK) acting director for financial markets John Birech said the new borrowing will be only Sh5.04 billion.

The government was seeking Sh40 billion in a 15-year bond and was offering to pay investors 12.5 per cent as a coupon (interest) annually.

“The market is expecting a tap (reopened) sale any time following the acceptance of only Sh5 billion in the bond. We see the Treasury as just trying to keep its borrowing costs low,” said Crispus Otieno, a fixed-income dealer at AIB Capital.

READ: Treasury eyes Sh40bn from well-paying new roads bond

Mr Otieno added that the rejected cash is likely to keep the money market liquid in the coming weeks, making it easy to have high subscription of the tap sale and other fixed-income securities.

“The regulator threw the market a curve ball in Thursday’s auction, only accepting nine per cent of the Sh55.7 billion bid. We expect there will be a tap sale on the bond to fill the balance,” said Genghis Capital in a note to investors.

The subscription of the infrastructure bond was a 139.39 per cent. The weighted average yield that investors were asking for stood at 13.026 per cent.

READ: Treasury raises Sh42bn from oversubscribed infrastructure bond

This means that they wanted to get it at a discount in order that their eventual return is higher than what is represented by the interest paid on it.

However, the Treasury took the paper at a yield of 12.505 per cent, just about the same as the coupon or interest to be paid on the paper.

The Treasury rejected all the expensive bids as it tries to keep the price of public debt low. In the previous auctions for such a bond the rate was 13.177 per cent.

As of now, the Treasury is spending over half of its ordinary (or mostly tax) revenues in servicing the public debt that currently stands at over Sh4 trillion.

Various institutions and analysts have warned on the amount of the debt and its cost, urging the Treasury to curb its appetite for borrowing.