Kaduna State Government has obtained an approval from its shareholders to restructure its N8.5billion bond which was set to expire in 2015. According to the terms of deal as explained in the papers, kaduna State Government will immediately repay bondholders N1500362259 in principal repayments from its sinking fund along with outstanding interest. The balance of the loans will now be paid semi-annually along with the interest until the loan is fully paid in 2015. The difference is that in the previous deal, Kaduna State was meant to make a bullet repayment of Principal at the end of 2015. Now what are the implication of this?
According to State Government advisers;
“The issuer desires that the balance in the sinking fund account should be utilised towards the reduction of outstanding principal, the rest of the bond repayments should be restructured to semi-annual payments; consisting of interest payment and amortisation of principal for the remaining two years to expiration, that is September 1, 2013 to August 31, 2015,” she said.
Explaining the rational for the restructuring, the Group Deputy Managing Director of BGL Plc., Financial Advisers to Issuer, Mr. Chibundu Edozie, said Kaduna State was of the opinion that the immediate repayment of a part of the principal and the revision of the repayment to amortisation structure would be favourable to the bondholders as it gives them immediate access to liquidity.
But that isn’t really the true reason to me. The State Government by paying down on principal has used the opportunity to reduce its future rent obligations. It makes no sense for them to keep Principal payments in a sinking fund that will probably attract a yield that is lower than the interest rates they are paying on their bonds. So rather than keep that money it makes sense to apply part of it straight to repay principal and as such rather than pay interest on N8.5billion for the remaining tenor of the bond they pay on the outstanding balance. In addition to that, they also now pay principal and interest semi-annually which also helps reduce interest payments down the line. I also think rather than apply the entire N6.8billion in the sinking fund they applied only N1.5billion for cash flow reasons.