What is an infrastructure bond: Is time ripe for companies to tap into bond market?

By Odhiambo Ocholla

There is a lot of liquidity in the market as witnessed by the oversubscription of the 12 year "infrastructure bond".

The Government issued the "Infrastructure bond" with the objective of raising Sh18.5 billion to finance specific projects in roads, energy and water sectors but ended up receiving a whopping Sh26.8 billion from the market representing over-subscription rate of 45 per cent thanks to high liquidity, incentives and the way the bond was structured.

Of interest was the impressive participation of small investors to the tune of Sh1.4 billion which is an indication of broadening of the investor’s base with diverse risk profiles which eventually improves the bond market liquidity.

The significance of direct participation of individual investors in a bond market is that; one, it reduces reliance of the Government on captive investors, second it promotes a fixed income investment culture and lastly, it increases competition in the banks deposits market.

The "Infrastructure bond" returned a weighted average rate of 13.505 per cent and a quick review of the yield curve indicates that a bond of similar tenor currently has a yield of 12.45 per cent thus investors who participated in the primary market would be laughing all the way to the bank when they trade and obtain good quotes in the secondary market.

Some investors are sure of making a margin of 100 basis point clear! I believe this is a decent year for bonds and they will trade in a range that is attractive to investors.

The issuance of Twelve years "Infrastructure bond" was a bold step and an important landmark in our capital market and this development should give more confidence to the private sector to start rolling out long-term bonds for funding infrastructure projects.

The "Infrastructure bond" also provided a litmus test for investor’s confidence and confirmed the overwhelming appetite for the long-term Government securities.

Liquidity in the market

According to the Central Bank of Kenya (CBK) Treasury bond issuance programme the Government is this month coming back to the debt capital market to raise Sh8 billion with Sh4.4 billion earmarked for redemption while Sh3.6 billion represents new borrowings. This is a good initiative but the Government must guard against crowding out the private sector from the debt capital market.The high liquidity in the market can be partly attributed to the CBK reduction of cash ratio for commercial banks by 100 basis point from six per cent to five per cent thus increasing liquidity and availability of credit in the market.

Since the start of the year the interest rates are falling with yields at the short end declining more than at the long end of the yield curve.

Further money market rates are likely to see a downward pressure; mostly due to a downward yield movement in benchmark Treasury bill rates.

The economic growth momentum has slowed considerably and high liquidity conditions may push interest rates lower couple with the presence of risk appetite among market players.

Are these good indicators for private sector to issue corporate bonds? I believe going forward companies would tap the debt capital market at relatively cheaper cost.

Decent year

Though the primary corporate bond markets proved hostile territory for many corporate in the past years because of high interest rates, this year is going to be a decent year for corporate bonds issuer as interest rates falls.

While corporate wishing to access the bond markets might find it useful to expand their knowledge and learned to harness their power in the bond markets nowhere has investors' power been exercised more forcefully than in the primary bond market.

At first glance, the basic economic principle of supply and demand suggests that launching a new corporate bond issue should be easy.

While pricing, supply and demand are clearly key factors, finding the right equilibrium is a more complex process than it may at first appear, and several other elements need to be taken into account in order for a new deal to succeed.

I believe that issuers should have a clearly stated timetable for the whole roadshow, book building and pricing process.

Mr Odhiambo Ocholla is an Investment Banker based in Nairobi and can be reached at charlesocholla@yahoo.com