Banks’ dollar debt surge 156% as yield hunt fuels demand

Bond sales in the United States’ currency from Nigerian lenders jumped 156 percent to $1.54 billion year to date, compared to just $600 million in the corresponding period of 2013, as banks took advantage of global liquidity and the hunt for yield by investors in developed markets, data compiled by BusinessDay show.

The markets for corporate bonds in Africa’s largest economy are virtually nonexistent, except for bank issuance.

First Bank of Nigeria was the latest lender to float dollar bonds as it sold $450 million over the weekend at a yield of 8.25 percent and coupon of 8 percent.

The yield on the 10-year US Treasury (UST) note fell to 2.45 percent as of 11:39 ET yesterday, according to Bloomberg data.

Three other lenders – Zenith Bank, Access Bank and Diamond Bank – had sold dollar bonds earlier this year.

This follows the July 2013 issuance by First Bank, of a $300 million Eurobond launched at a yield of 8.5 percent, and Fidelity Bank’s 5-year $300 million Eurobond issued on May 2, 2013 with a coupon of 6.875 percent and a 635 basis point (bps) spread over UST.

“At the time (2013), market conditions were somewhat less supportive than today and there was some reluctance among foreign investors to purchase tier II-paper,” said Samir Gadio, head, Africa strategy FICC research, Standard Chartered Bank.

“However, given the favourable environment in the Eurobond market at present and tight valuations across the board, the proposed yield looks attractive disciand it is likely that the new issue will gain in the secondary market from those levels,” Gadio said.

Investors are buying bond issuances from emerging market corporates such as Nigerian banks, as the favourable trends of rising domestic consumption, economic growth and firm outlook for oil prices support bids. This has allowed banks to diversify their sources of funds as well as match dollar loans to financing.

“We expect more banks, especially within the tier-II space, to embark on capital raising activities, either in the form of tier-I or tier- II capital,” said Abiodun Keripe, head, research and strategy, Elixir Investment.

“This basically is for two reasons: to achieve their medium-to-long-term growth targets in terms of lending, and capacity building, and to keep up with regulations… via adoption of the Basel II and III framework,” Keripe said.

Lenders increasing exposure to dollar liabilities (Eurobonds) to match expected dollar-denominated loans to the power and oil and
gas sectors may leave them exposed to currency risk in event of a currency (naira) devaluation.

Nigeria’s consumer inflation rose for the fourth straight month in June to hit 8.2 percent, a 10-month high, driven by higher food
prices, the National Bureau of Statistics (NBS) said last week.

The naira is down about 2.3 percent versus the dollar this year and eased 0.21 percent against the greenback on Monday to close N162.25.

Nigeria’s foreign-exchange reserves declined 12 percent this year to $38.49 billion by July 18 as the Central Bank (CBN) sold dollars to prop up the naira and as oil production missed
estimates.