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The Central Bank of Kenya (CBK) is offering investors in three Treasury bills and a five-year bond the chance to swap their holdings into a longer-dated bond, in a KSh10 billion switch auction that closes on November 9.
According to the auction prospectus, which CBK published on Friday, holders of Treasury bill issues 2696/091, 2657/182 and 2585/364 and Treasury bond FXD1/2023/005 can move some or all of their holdings into FXD4/2019/010, a ten-year bond issued in 2019 that has about three years left to run.
What is on offer
The destination bond pays a coupon of 12.28 percent and matures on November 12, 2029. Its interest is taxed at 10 percent withholding tax, compared with 15 percent on the bills and on FXD1/2023/005. Coupons are paid every six months, with the next one due on November 16, 2026, and the last on maturity in November 2029.
The three bills being retired are a 91-day, a 182-day and a 364-day issue, all maturing on November 23, 2026. CBK lists them at a price of KSh99.7132 per KSh100 face value, at a prevailing market yield of 8.7499 percent.
The source bond, FXD1/2023/005, is a five-year paper that pays a coupon of 16.8440 percent and matures on July 10, 2028. CBK prices it at KSh115.8913 per KSh100 at a market yield of 9.9627 percent. Holders of this bond are being asked to give up the higher coupon for a lower one that runs about 16 months longer.
How the auction works
The switch uses a multi-price auction, so successful bidders pay the price that matches the yield they quote. CBK’s pricing table runs from a clean price of KSh105.8051 per KSh100 at a yield of 10 percent down to KSh95.8800 at 14 percent. At a yield of 12.28 percent, equal to the coupon, the clean price is KSh99.9951, and buyers also pay accrued interest of KSh5.9713, for a total of KSh105.9664 per KSh100.
The sale period runs from October 23 to November 9. Bids must reach CBK by 10:00 a.m. on November 9, the auction date, and settlement is on November 11. Non-competitive bids range from KSh50,000 to KSh50 million, while competitive bids start at KSh2 million per CSD account per tenor.
Only investors with unencumbered holdings in the four source securities as at November 9 can take part. Anyone with outstanding pledges must cancel them five days before settlement. Participation is voluntary, and CBK reserves the right to allocate the bond in full or pro rata, or to reject bids without giving reasons.
Results will be posted on the DhowCSD investor portal and app under the Bids tab on November 9. Any leftover cash below the KSh50,000 minimum will be refunded on November 11. CBK says it will rediscount the bond only as a last resort, at 3 percentage points above the prevailing market yield or the coupon, whichever is higher.
Why it matters
A switch lets holders exchange the securities they already own for the destination bond instead of waiting to be repaid in cash. For bill holders, the choice is between taking cash when the bills mature on November 23 and reinvesting at whatever rates are then available, or locking in about three years of 12.28 percent coupons taxed at 10 percent.
On our own arithmetic from the prospectus figures, each KSh100 of FXD4/2019/010 pays KSh6.14 in interest every six months before tax, or about KSh5.53 after the 10 percent withholding tax.
The switch sits alongside CBK’s November primary issue, which reopens KSh50 billion in 15- and 30-year bonds. Short-term rates have been easing, with the 91-day bill at about 8.75 percent at recent auctions. New investors can read our guide on how to buy Treasury bills in Kenya through DhowCSD.
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