State bets on Sh88b bond swap to lessen debt repayment load

The State will be hoping investors holding on to four government securities will switch them for a new infrastructure bond.

The three Treasury bills and one Treasury bond, which will fall due in 35 days, could be switched for the new infrastructure bond set to mature in six years, amounting to Sh87.7 billion.

"Central Bank of Kenya (CBK), acting in its capacity as fiscal agent for the Republic of Kenya, invites bids for the infrastructure bond via switch auction that is offered to investors with holdings in T-bills issue Nos 2494/91, 2454/182, 2380/364 and T-bond issue No FXD1/2021/2," reads the prospectus for the infrastructure bond.

Like many other infrastructure bonds, investors will not pay withholding taxes on the new bond. Experts reckon that the government is trying to reduce the refinancing risk that it may be confronted with in January when the four government papers mature.

"The government is approaching holders of those securities with an aim of stretching their maturities," said Churchill Ogutu, an economist at Mauritius-based IC Group.

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A big chunk of the source securities, or government papers to be switched, is a two-year Treasury bond valued at Sh55.85 billion.

It is followed by a 364-day Treasury bill, or short-term government security, which is valued at Sh12.19 billion.

Then there are two Treasury bills - 91 days and 182 days - valued at Sh10.97 billion and Sh8.8 billion respectively.

While the interest rate for the government papers to be switched is 8.865 per cent, the government has enticed them with a market-determined coupon rate that is likely to be higher than the 12.5 per cent they got, going by the current rates of infrastructure bonds.

Bond switching is a transaction of exchanging a particular series of existing bonds held by investors (source bonds) with a particular series of selected bonds (destination bonds).

This transaction can be used as a tool for refinancing and increasing liquidity in the debt securities market. It is not the first time the government has advertised for a switch bond, the last time being in 2020 when they targeted holders of the then-upcoming 364-day Treasury bill valued at Sh25.6 billion.

However, Treasury was able to receive Sh19 billion, less than what it had wanted.

It is also possible for CBK to fall short of its target of switching all four securities, in which case it will proceed with its government security issuance.