Falling Eurobond yields signal improved risk assessment of Nigeria

Secondary market yields on Nigeria’s Eurobonds for the various maturities have declined from the levels they were at the time they were issued, indicating that investors may have become positive about the country’s capacity to service its sovereign debt obligations.

Falling yields on the country’s Eurobonds mean that their prices are rising as investors scramble to add them to their portfolio in pursuit of increased returns.

Analysts say that the rising prices of the bonds may be an indication that foreign investors prefer to invest in Nigeria’s Eurobonds to earn higher income since yields on sovereign bonds from developed economies are much lower.

“The investors may be flocking to Nigeria’s Eurobonds because the bonds offer them opportunity to increase the performance of their portfolio,” said Ikechukwu Obi, a senior bond trader at Fidelity Bank Plc in a telephone interview with BusinessDay. “The yields are relatively high and there is no currency risk since the interest and principal will be paid in dollars.” 

The highest average yield on triple A-rated bonds issued by governments in the Euro area was 1.40 per cent as at June 29 2017, according to data on the website of the European Central Bank. Yields on US treasury securities remained below 3 per cent as at June 30, according to Bloomberg.    

Africa’s biggest economy was plunged into recession for the first time in 25 years as output contracted 2.06 per cent between April and June 2016, sabotaged by unanticipated fall in global oil prices. Crude oil sales contribute up to 70 per cent of Nigeria’s revenues.      

The Debt Management Office (DMO), the government agency charged with managing Nigeria’s loans, had sought to establish a visible competitive presence in the International Capital Market (ICM) when it introduced its first Eurobond in January 2011.

With the Eurobonds accepted by global investors, the DMO has issued up to four Eurobonds, each fully subscribed, with some oversubscribed.

Mozambique had defaulted on its dollar bonds when it failed to pay close to US$60 million interest which fell due in January this year, stoking fears of an imminent debt crisis in Africa. However, this fear seems to have been at least partly doused with the apparent rush for Nigeria’s Eurobond by investors.

Data obtained from the website of the DMO showed that yield on the US$500 million Eurobond maturing in July next year, which stood at 5.375 per cent when it was issued, had dropped by 2.158 percentage points as at June 29 2017.     

The yield on the US$500 million that will mature in January 2021 dropped 2.203 percentage points as at the review date, from 7.000 per cent at issue. The US$500 million Eurobond maturing in July 2023 shed its yield by 0.907 percentage points to close at 5.718 per cent. 

Similarly, the price of the US$1.5 billion Eurobond maturing in February 2032, the latest issue by Africa’s biggest economy, declined by 0.979 percentage points to 6.896 per cent, according to the DMO data.   

Obi said that in addition to the zero currency risk on Nigerian Eurobonds, recent macroeconomic developments such as oil prices that have risen above Nigeria’s 2017 budget benchmark, in addition to improved foreign reserves, may have signalled to investors that the country will return to the path of prosperity with improved capacity to honour its debt obligations.

INNOCENT UNAH