CBK seen capping premium on reopened 5-year bond

Investors are likely to get only a limited premium on the initial coupon on the re-opened five-year bond currently on sale, with the Central Bank tipped to continue its stance of rejecting expensive bids, analysts have said.

Analysts at NCBA and investment bank AIB Capital have tipped investors to demand between 11.70 and 11.85 per cent for the Sh30 billion offer.

The offer is a reopening of the bond sold earlier this month, which sought to raise Sh50 billion. In the sale, the government took up Sh20.8 billion from bids amounting to Sh34.53 billion, at an average of 11.67 per cent.

The quick reopening of a bond within a week of its sale is uncommon, suggesting the State is keen to raise additional funds at a time when the Covid-19 outbreak has hit tax collections amid heavy maturities of debt.

Also indicative of the cash crunch is the move by the government to offer a six-year infrastructure paper exclusively to investors due for Sh14.2 billion in maturities from a one-year Treasury bill sold in June 2019 as an option for rolling over the funds.

“While room for aggressive bidding may be limited on the reopened five-year bond, we anticipate the paper could still sell at a discount within the range of 11.75 to 11.85 percent,” said NCBA in a fixed income report.

“Appetite may remain healthy although there is a fair chance of undersubscription, the liquidity position notwithstanding.”

Latest reports by CBK show that there is ample liquidity in the market, with banks especially holding a significant amount in excess of their minimum cash requirements.

By the end of last week, lenders’ excess reserves stood at Sh36.5 billion in relation to the 4.25 percent cash reserves requirement, while the inter-bank rate has also come down to 4.3 percent from 6.3 per cent a month ago.

Analysts at AIB Capital reckon, however, that the CBK will still reject overly aggressive bids, similar to the first sale of the bond earlier this month.

“We advise investors to bid within the range of 11.7 to 11.85 per cent for the five-year bond as CBK is likely to reject aggressive bids,” said the investment bank in a note on the offer.