The Treasury has for the first time published a calendar showing its planned issuances of debt securities, revealing the return of switch bonds to address refinancing risk on papers falling due in April and May next year.
Issuing a switch bond involves the direct conversion of maturing Treasury bills and bonds into longer-term security, cushioning the exchequer from a liquidity crisis.
The Treasury’s 2024/2025 Annual Borrowing Plan publication shows that the first of the two switch bonds will be issued next month, targeting a three-year bond and a nine-year infrastructure bond which were sold in April 2022 and April 2020 respectively.
The three-year bond has an outstanding value of Sh60.6 billion, which falls due on April 7, 2025.
Although the infrastructure bond’s final maturity date is in 2029, it carries an early partial maturity (amortisation) date of April 7, 2025, covering 50 percent of its total outstanding value of Sh118.5 billion.
In total, the Treasury will be asking bondholders on the two papers to switch a total of Sh100.1 billion onto a new bond, whose tenor is expected to be between five and 10 years.
The second switch bond, also carrying a tenor of between five and 10 years, will be rolled out in January 2025 to retire a five-year bond that was floated in May 2020, whose outstanding amount is Sh104.5 billion.
“Planned switch auctions for the financial year will be part of the borrowing strategy,” said the Treasury.
“This process includes selecting the best mix of instruments to replace maturing bonds, creating attractive new products for investors, engaging closely with stakeholders, incorporating appealing features into new bonds, and maintaining clear and consistent communication with the market to build confidence and credibility.”
The Treasury has been forced to turn to the switch bonds to prevent a liquidity crisis due to heavy borrowing needs from the domestic market in the current fiscal year.
In addition to the net domestic borrowing target of Sh413 billion, the government also needs to raise an additional Sh570 billion to refinance maturing debt, while also spending Sh750 billion in domestic debt interest payments.
Domestic debt maturities are usually funded by rolling over the debt via new bond issuances, and rarely through repayments from tax collections since the government is already running a budget deficit. Rolling over the debt through ordinary bond sales however means that rollovers can affect the government’s ability to make new borrowing for budgetary purposes, especially when these bonds are undersubscribed.
A switch bond therefore helps avoid the competition for funds between maturities and new borrowing.
The Treasury floated its first switch bond in June 2020, offering investors a six-year infrastructure paper in exchange for a maturing one-year Treasury bill that the state was looking to roll over. This swap netted Sh20.2 billion out of a target of Sh25.6 billion.
The second switch bond was sold in December 2022, seeking Sh87.8 billion via a six-year infrastructure bond, targeting holders of maturing Treasury bills worth Sh31.96 billion and a maturing two-year bond that had an outstanding amount of Sh55.85 billion.
This switch bond raised Sh47.8 billion, with holders of the two-year bond accounting for the bulk of the switch at Sh39 billion.
