Nigerian foreign debt issuers caught in web of volatile forex

The increasing preference by Nigerian corporates for dollar denominated debt is a market risk regulators should watch, else it leads to a need for government intervention or bail out in the long term, analysts say.

According to the analysts, the development is capable of exposing their risks, considering the volatility in the foreign exchange market.

For instance, bond sales in the U.S. currency from Nigerian lenders jumped 156 percent to $1.55 billion in the first seven months of 2014, compared to $600 million in the corresponding period of 2013, as banks took advantage of global liquidity and low yields in developed markets, data compiled by BusinessDay show.

“The foreign countries interest rates may seem lower, but in real terms, it is not necessarily so. Default risks that may arise from a local country’s foreign exchange (forex) and inflation rates should not be ignored,” said Reid Click, professor of International Business at George Washington University, United States of America.

The naira traded lower against the greenback on Wednesday, to a mid price of N165.40/$, at interbank, bringing it to 2.9 percent weaker this year.

Nigeria’s consumer inflation for September rose by 8.3 percent, the National Bureau of Statistics said this month.

The country’s foreign-exchange reserves have declined 13 percent this year, to $39.3 billion by Oct 27 as the Central Bank sold dollars to prop up the naira and as oil production missed estimates.

Since the United States Federal Open Market Committee (FOMC) met in mid-September, oil prices have tumbled 14 percent, the NSE All Share Index of stocks YtD returns have dipped to -7.36 percent, and bond sell-sentiment have resurfaced with yields on benchmark 10-year sovereign notes due 2022 rising 18 basis points to 12.63 percent in October, from 12.45 percent in September.

Nigerian lenders have $3.4 billion in outstanding Eurobonds, 126 percent higher than the $1.5 billion in sovereign Eurobond issuances.

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

Yields on Nigeria’s $500 million of bonds due July 2023 closed trading at 5.48 percent, as at October 28, according to data from the Debt Management Office (DMO).

The U.S. 10 – year increased two basis points, or 0.02 percentage points, to 2.32 percent as of 11:31 a.m. in New York, on Oct 29 according to Bloomberg Bond Trader data.

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

Lenders are going the Eurobond route in a bid to support credit expansion to the power and oil and gas sectors.

“On average, it cost a Nigerian bank between 6.0 percent and 9 percent to issue debt in the Eurobond market, compared to 14.5 percent average yield on local currency corporate bonds,” said investment firm Afrinvest in its 2014 banking report.

Nevertheless the Central Bank of Nigeria (CBN) in a bid to check the potential risk inherent in foreign-currency borrowings by banks, recently limited foreign-currency borrowings by Nigerian lenders, as it seeks to reduce their exchange risks.

Overseas currencies should not exceed 75 percent of shareholders’ funds, the CBN said in a statement posted on its website on Monday.

“Net Open Position of overall foreign-currency assets and liabilities” are not to exceed 20 percent of shareholders’ funds, it said.

The CBN also mandated that lenders have liquid foreign assets to cover maturing foreign-currency obligations and to borrow and lend in the same currency to avoid “mismatch associated with foreign-currency risk,” according to the statement.

“The yield curve will be dominated by the risk-off sentiment of investors, as protracted weakness in oil price and bearish outlook on fiscal finance renew concern on naira devaluation,” said analysts at Associated Discount House Limited, a Lagos-based financial institution.

Some analysts have expressed concern that the declining oil price may affect the ability of oil companies to service their loans, and the ability of power companies that earn naira to service dollar debts to banks.

Brent for December settlement gained $1.72, or 2 percent yesterday, to $87.75 a barrel on the London-based ICE Futures Europe exchange.

The Nigerian Stock Exchange (NSE) Banking Index, which tracks the nation’s 10 biggest banks by market value, has lost – 13.23 percent as of October 28.

Click also noted that dollar appreciation is a big risk for all local institutions that borrow in a foreign currency.

  “Foreign currency debts simply move the risks from the lender to the borrower. Issuers (Companies) should always evaluate the cost of debts against the risks of debts,” he said.

Iheanyi Nwachukwu & Patrick Atuanya