Govt issues k15bn bond, investors sceptical

Government on Tuesday issued a K15 billion ($27.5 million) five-year fixed coupon bond at a rate of 11 percent to restructure the ballooning domestic debt, according to Reserve Bank of Malawi (RBM).

In economics, debt restructuring is a process that allows a private or public company, or a sovereign entity, in this case government, facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts to improve or restore liquidity to continue its operations.

But according to the issuer, the bond may be listed on the Malawi Stock Exchange (MSE) and, if not fully subscribed, it will remain open until fully subscribed.

The issuance of the K15 billion bond yesterday comes after the central bank also issued two K20 billion ($36.7 million) bonds at rates of 14 percent and 12 percent respectively, but did not attract the expected response.

Results of the K20 billion bond issued at a 14 percent rate showed that only six subscribers were successful out of 38 investors that applied and that only K5.56 billion was subscribed, leaving K15.94 billion ($29.3 million) unsubscribed.

NBM Capital Markets assistant market analyst Paul Mojoo yesterday said investors are sceptical to invest in long-term treasury notes as risks remain high.

He said the biggest hiccup in treasury notes has been reaching a consensus on bond pricing between the borrower (the treasury) and investors.

“When pricing the bonds, assumptions were that the economy would normalise and interest rates would ease in the future, hence the treasury would like to discount the bonds with lower yields,” he explained.

Mojoo said investors look at pertinent issues such as budget financing and a widening trade deficit, which increases chances of fiscal slippages and undermine the probability of the financial system ever normalising in the near future.

“It is such uncertainties that are discouraging investors from committing funds in fixed income instruments for longer periods at the offered prices,” he said.

Another analyst said pricing of treasury notes and listing a bond at a time there other treasury notes being auctioned on the market are some of the factors that make government bonds unsuccessful.

But MSE operations officer, Douglas Nyirenda, in an earlier interview said issuance of bonds stand to benefit the country’s economy by providing an alternative avenue for borrowing.

He said with long-term bonds, investors are likely to look at the yield against the projection with a spectrum of the given year or years and enable government to sustain its commitment to the banks and other avenues.

Bonds are investment instruments with low entry cost and highly efficient, transparent and convenient investment tools designed to appeal not only to institutional as well as retail investors.

In December 2014, government also issued three bonds worth K109.2 billion ($200.4 million) but investors’ response was lukewarm.