(NAIROBI, KENYA) – Investors have paid a premium to switch KES 11 billion ($85.6 million / £66.8 million) of holdings from a bond maturing in February 2028 into another government paper offering a higher interest rate and a lower withholding tax rate. The switch was conducted by the Central Bank of Kenya.
Investors were asked to swap KES 10 billion ($77.8 million / £60.7 million) from a 15 year bond first sold in 2013 into a 10 year paper first issued in 2019. The 2013 bond matures in February 2028 and carries an annual interest rate of 11.25%. The 10 year bond pays interest at 12.28% and matures in November 2029.
In addition to the higher coupon, investors moving their capital were effectively buying into a three year exposure at a withholding tax rate of 10% on interest earned. This is lower than the 15% tax that would apply if they were to buy a brand new three year bond. All bonds of five years and below attract a 15% tax on interest.
A switch bond occurs when holders of a paper nearing maturity are offered the exclusive chance to move all or part of their principal directly into another longer bond.
Investors offered to swap KES 13.52 billion ($105.2 million / £82.1 million), with the Central Bank taking up KES 11 billion. The bondholders agreed to an average price of KES 106.79 ($0.83 / £0.65) per bond unit of KES 100 ($0.78 / £0.61) to secure the switch.
The premium included a KES 3.84 ($0.03 / £0.02) charge per unit to cover accrued interest. Investors will receive their next coupon earlier in November 2026 on the new bond instead of February 2027 had they kept their money in the 15 year bond.
A unit of a bond is normally priced at KES 100, with investors earning a return from the paper’s fixed interest rate. When a reopened bond pays a lower return than the market demands, investors receive a discount on the KES 100 to encourage them to lend to the government. When investors accept a return lower than a bond’s coupon rate, they pay a premium to the Central Bank to secure the bond.
This was the second straight switch bond sale in which investors were asked to transfer holdings into the 10 year 2019 paper. In August, investors swapped KES 22.5 billion ($175.1 million / £136.6 million) from maturing Treasury bills and a 15 year paper from 2021.
Analysts at Sterling Capital said the repeated use of the 10 year 2019 bond could reflect Central Bank efforts to manage upcoming maturities while extending into a debt security that poses less redemption risk given the timeline and outstanding amount.