Every Treasury Bond has terms and conditions stipulated in the bond prospectus. This document 👇🏾:
Investors in Kenya are used to long-term bonds where there’s only one redemption date (when your principal amount is paid back in full). For example, an 18-year bond issued in 2023 where your principal will be paid in full in 2041.
If you’re a visual learner, watch the video on our YouTube Channel:
The June 2023 Infrastructure Bond (IFB1/2023/007) has 2 conditions that people seem not to understand and I’ve been receiving numerous questions from The Wealth Tribe.
You need to understand the 2 conditions before you invest:
✅ Redemption Structure
Redemption Structure simply answers the question: When will your principal amount be repaid?
Bond amortization means the gradual or regular repayment of the face value (principal) and the interest on the bond in the course of its life.
Simply, it’s the process of paying off a debt with regular payments.
Now that you understand the meaning of the two, let’s get to the specifics:
Tenor (Time Period): 7 Years
Redemption Date: 10th June 2030
Coupon Rate: Market Determined (see an explanation at the end of the article)
Period of Sale: 26/05/2023 to 13/06/2023
Value Date (when your amount has been received for crediting CBK): 19/06/2023
What’s the difference between the value date and the payment date?
Amount on Offer: Kshs. 60 Billion
Purpose: For funding infrastructure projects in the FY 2022/2023 budget estimates
Minimum Investment Amount: Kshs. 100,000
Taxation: The bond will be tax-free as is the case for infrastructure bonds as provided for under the Income Tax Act.
15th June, 2026 – 20% of unencumbered outstanding principal amount.
13th December, 2027 – 30% of unencumbered outstanding principal amount.
10th June, 2030 – 100%, final redemption of all outstanding amounts
No partial redemption will be paid on encumbered securities on amortization dates.
Any amounts up to Kshs 1.0 million per CDS account at amortization will be redeemed in full except for encumbered securities.
Encumbered securities: These are bonds that have been used as collateral for a loan.
We often hear real estate investors say ‘the land has encumbrances’ after a search. This means that the said land was used as collateral for a loan and therefore cannot be transferred to a new owner.
So, what do the above terms mean in layman’s language?!
Those who invest 1 million or less will get their FULL principal amount back in 3 Years (15th June 2026)
In a nutshell, this is a 3-year Infrastructure bond for anyone who invests 1 million or less because you’ll get ALL your money back on 15th June 2026. It also means that will be the end of receiving interest payments.
If you invest Kshs 100,000 then use Kshs. 20,000 of your bond as collateral for a loan, the Kshs 20,000 will be encumbered. If you won’t have paid back your loan by 15th June 2026, only Kshs 80,000 will be paid back. The Kshs 20,000 will be paid either in 2027 or during the final redemption date in 2030, depending on when you’ll pay the loan.
If you invest Kshs 1,000,000 then use 20% of your bond as collateral, the Kshs 200,000 will be encumbered. If you won’t have paid back your loan by 15th June 2026, only Kshs 800,000 will be paid back. The Kshs 200,000 will be paid either in 2027 or during the final redemption date in 2030, depending on when you’ll pay the loan.
Is receiving your principal amount early a good or a bad thing?
This is great for retail investors most of whom put in amounts under 1 million. You get ALL your money back in 3 years to spend or invest elsewhere.
Secondly, it lowers your inflation risk because returns on this bond are not inflation-adjusted.
The rising interest rates are still a risk to your Investment.
Higher interest rates= Lower Bond Prices
In other words, interest rates are expected to rise in line with rising inflation, so investors are wary of the risk rising interest rates pose to the market value of bonds.
Rising interest rates affect the market value of bonds, especially bonds with longer maturities. Being able to cash in part of your principal sooner gives you the ability to invest in other high-yielding instruments.
What of those who invest more than 1 million?
Those who invest more than 1 million will get back 20% of their unencumbered principal amount back in 3 years (15th June 2026), 30% of their unencumbered principal amount in 4 years (13th December 2027) the final 50% on 10th June 2030.
Note: If you use 100% of your bond as collateral for a loan, the partial redemption won’t apply to you: you won’t get paid on 15th June 2023 & 13th Dec 2027.
If you invest Ksh 1,050,000 and then use Kshs 150,000 of your bond as collateral for a loan, the Kshs 150,000 will be encumbered. On 15th June 2026, you’ll receive 20% of your unencumbered amount: Kshs 180,000. On 13th December 2027, you’ll receive 30% of your unencumbered principal amount: Kshs 270,000. You’ll receive the rest of your principal amount either in 2027 or during the final redemption date on 10th June 2030, depending on when you’ll pay the loan.
If you invest Kshs 5,000,000 and then use Kshs 1 million of your bond as collateral for a loan, the Kshs 1,000,000 will be encumbered. On 15th June 2026, you’ll receive 20% of your unencumbered amount: Kshs 800,000. On 13th December 2027, you’ll receive 30% of your unencumbered principal amount: Kshs 1,200,000. You’ll receive the rest of your principal amount either in 2027 or during the final redemption date on 10th June 2030, depending on when you’ll pay the loan.
Other questions about the June Infrastructure bond:
1. What does a Market Determined coupon rate mean?
The coupon rate will be determined through the auction process when investors submit their bids. We’ll know the average rate from Central Bank after the period of sale ends.
The rate is likely to be higher than the previous March Infrastructure bond (IFB1/2023/17) which gave us a coupon rate of 14.399%
For a full beginner’s guide on how to start investing in Treasury Bonds in Kenya, click here.
2. If I can’t invest now, will the bond be re-opened in future?
The bond prospectus states that ‘the bond may be re-opened at a future date.’
This is usually at the sole discretion of the Central Bank of Kenya.
If you miss an opportunity to participate in the primary market, you can still buy the bond in the secondary market (Nairobi Securities Exchange) through an approved stock broker when it begins trading on Tuesday, 20th June, 2023.
3. How do you bid for the infrastructure bond?
To bid for bond, you need a Central Depository for Securities (CDS) account maintained at the Central Bank of Kenya.
This is different from the CDSC (Central Depository Securities Corporation) account that you need to buy equities/shares.
If you already have a CDS account, you can submit your bid through the CBK-TMD (Treasury Mobile Direct) USSD code *866#. For more information, read this full guide.
You can also invest through:
- Commercial banks
- Investment banks and
- Stock brokers located in Kenya
- Non-bank financial institutions
- Licensed investment advisors
They will charge you management fees which is usually a portion of your investment capital.
A smart investor breaks the chain of going through such intermediaries which is why investing directly through CBK is the best option and the only option we recommend.
4. Why should you invest in the infrastructure bond?
- Passive income – coupons/interest paid every 6 months.
- Relatively high returns – we expect the coupon rate to be 14.399%% or higher.
- Tax-exempt – interest from infrastructure bonds is exempted from withholding tax.
- Risk-free investment.
- You can sell it in the secondary market(Nairobi Securities Exchange) through an approved stockbroker.
- You can access a loan facility from commercial banks by using the bond as collateral.
Always remember to bid average if you don’t want your bid to be rejected! If you have 20M and above, submit a competitive bid!
If you have more questions, leave them in the comments section!
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