Treasury Redeems KSh 15.2Bn 12-Year Tax-Free Infrastructure Bond

Redemption Details

The National Treasury has successfully redeemed the 12-year tax-free infrastructure bond IFB1/2013/12, settling KSh 15.2 billion on 15 September 2025. The bond carried an 11% coupon and was originally structured as a multi-tranche amortised bond.

It was first issued in September 2013, with two redemption points:

• An 8-year tranche worth KSh 12.39 billion, which matured in September 2021.
  
• A 12-year tranche valued at KSh 15.21 billion, which has just matured.
  

This dual-tranche structure allowed the government to spread repayment obligations while maintaining a single ISIN reference.

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Redemptions Earlier in 2025

The redemption of IFB1/2013/12 is the third major payout this year. Earlier, the Treasury settled:

• FXD1/2020/005 – a 5-year bond worth KSh 99.6 billion redeemed in May at a coupon of 11.67%.
  
• FXD1/2023/002 – a 2-year paper worth KSh 94.6 billion redeemed in August at an exceptionally high coupon of 16.97%.
  

These large obligations have eased part of the government’s domestic debt stock, though at significant cost due to the elevated interest rates on recent issuances.

Upcoming Maturities in 2025

The Treasury still faces additional repayments before year-end, with maturities totaling nearly KSh 54.9 billion. These include:

• IFB1/2022/006 and its switch tranche, both maturing on 1 December 2025, with a combined principal of about KSh 29.7 billion at a coupon of 13.215%.
  
• FXD2/2010/015 and related tranches maturing on 8 December 2025, with principal of KSh 25.2 billion at a coupon of 9%.
  

These upcoming redemptions carry lower average coupons than the August bond, offering some relief to the Treasury’s cash flows.

Why This Redemption Matter

Debt Sustainability

Kenya’s rising domestic debt burden has been a growing concern. According to Moody’s, the country spends nearly one-third of its government revenue on interest payments — among the highest proportions globally. Clearing bonds like IFB1/2013/12 provides short-term relief by removing high-coupon liabilities from the books.

Liquidity and Fiscal Space

The redemption demonstrates Treasury’s ability to honour commitments, which supports investor confidence. It also allows liquidity to circulate back into the banking system and capital markets, as investors receive principal repayments they can reinvest.

Refinancing Pressure

While redemption reduces debt stock, the government typically replaces maturing obligations with new issuances. The challenge lies in ensuring that replacement debt is raised at sustainable rates. With recent infrastructure bonds oversubscribed, Treasury has leaned heavily on domestic markets to roll over obligations.

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Kenya’s Borrowing Strategy

The government’s approach in 2025 has been one of front-loading borrowing. In August, Treasury raised KSh 179.8 billion through a tap sale of an infrastructure bond, adding to the KSh 95 billion raised earlier in the same reopening.

This has already pushed net domestic borrowing past KSh 260 billion, equivalent to about 41% of the annual target of KSh 635.5 billion for FY 2025/26. Analysts at NCBA note that near-term financing strain appears limited given strong investor appetite and ample liquidity. However, they caution that the strategy is sustainable only if tax revenues improve and external financing flows materialise.

Fiscal Pressures

Kenya’s fiscal deficit widened to 5.8% of GDP in the year ending June 2025, up from 5.6% previously. According to Business Daily, this was largely due to:

• Carryover spending of KSh 218 billion from the 2023/24 cycle.
  
• Revenue shortfalls after the Finance Bill 2024 was withdrawn, costing about KSh 344.3 billion.
  

Treasury projects revenues of KSh 3.32 trillion against expenditures of KSh 4.26 trillion in FY 2025/26, aiming to narrow the deficit to 4.7% of GDP.

Broader Debt Environment

Kenya is not only managing domestic obligations but also negotiating external debt terms. Talks with China are underway to convert the dollar-denominated Standard Gauge Railway loan into Chinese Yuan. Treasury estimates that switching from SOFR-linked repayments (with a 2% markup) to fixed Yuan rates around 3% could save taxpayers tens of billions annually.

On the global stage, Kenya’s Eurobond yields have eased slightly in 2025, tracking broader improvements in emerging market sentiment. But risks remain if global rates rise or investor confidence wavers.

Investor Perspective

For investors, redemptions mean the return of principal plus the benefit of attractive coupon payments. The 11% tax-free yield on IFB1/2013/12 was particularly lucrative, shielding investors from withholding tax.

Many institutional investors, including banks, pension funds, and insurance companies, will likely reinvest these proceeds into upcoming government securities. With equities underperforming in turnover and volatility, government bonds remain the safer option.

Market Dynamics

According to the Nairobi Securities Exchange, bond turnover dropped by over 20% in August following the large redemption of FXD1/2023/002, but demand is expected to remain strong for upcoming issues. The oversubscription of infrastructure bonds earlier in the year indicates deep investor confidence in fixed-income markets, despite concerns over fiscal deficits.

Regional Comparisons

• Ghana restructured much of its domestic debt in 2023 after defaults, showing the risks of over-reliance on short-term, high-coupon paper.
  
• Uganda has focused more on concessional multilateral financing, limiting domestic debt servicing costs.
  
• Nigeria has raised large amounts in domestic bonds, but yields remain high due to inflationary pressures and fiscal risks.
  

Kenya’s choice of longer-tenor instruments, such as 20- to 30-year bonds, spreads maturities but also locks in high coupon obligations for decades.

Risks Ahead

Despite the relief from the IFB1/2013/12 redemption, several challenges loom:

1. High interest burden – Domestic coupons of 11–17% remain steep compared to peers.
   
2. Revenue uncertainty – If tax mobilisation underperforms again, borrowing needs will balloon.
   
3. Crowding out – Heavy domestic issuance may crowd out private sector credit, raising lending rates for businesses.
   
4. External shocks – Currency depreciation or global rate hikes could worsen debt dynamics.
   

Outlook

The redemption of IFB1/2013/12 demonstrates the Treasury’s capacity to manage its obligations, but the broader issue of high debt costs remains unresolved. With about KSh 54.9 billion still maturing before year-end, and larger obligations due in 2026, the focus will be on how effectively the government can refinance at sustainable rates.

If tax collections rise and concessional funding is secured, Kenya can gradually lower its debt service-to-revenue ratio. However, without structural reforms and expenditure discipline, redemptions alone will not ease fiscal stress.

Conclusion

Settling the KSh 15.2 billion IFB1/2013/12 bond marks another milestone in Kenya’s domestic debt journey. For investors, it closes a profitable chapter of double-digit tax-free returns. For the government, it signals progress in meeting obligations but also highlights the heavy interest costs of past borrowing.

As more redemptions approach and new bonds are floated, the balancing act between financing needs, investor demand, and long-term sustainability will define Kenya’s fiscal trajectory in the years ahead.

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By: Montel Kamau

Serrari Financial Analyst

17th September, 2025