Nigerian banks have some $1.3 billion out of a total of $3.72 billion in outstanding Euro bonds due in the next two years and a rising global interest rate environment expected for the period may lead to higher refinancing costs.
Analysts are of the view that tighter monetary policy in the United States could potentially raise borrowing costs for banks that plan to tap the international bond markets in the future.
But they add that the direction of oil price, external reserve and broad macroeconomic environment are also important determinants on pricing.
The U.S 10-year Treasury yield slipped to 2.87 percent on Friday, roughly where it started the week as investors dissect the Fed’s semi-annual monetary policy report to Congress.
Wale Okunrinboye, a fixed income and FX analyst at Ecobank says since benchmark U.S Treasury’s are trending up and there is the possibility of a rate hike, Nigerian banks may have to pay a higher risk premium to refinance maturing bonds because the market is becoming more risk conscious.
“GTBank has offered to redeem its loans while Fidelity Bank has already rolled over theirs last year. Diamond Bank may look to refinance theirs,” Okunrinboye said.
“For Tier one lenders that are going to refinance, they will have to pay close to 9 percent while Tier 2 lenders will have to pay close to 10 percent given the rate at which they issued few years ago,” said Okunrubonye.
Fidelity Bank a tier – two bank rated B- by S&P Global Ratings and Fitch Ratings, or six steps into junk territory, issued $400 million of five-year securities with a 10.75 percent yield in October 2017.
Proceeds from the new Eurobond were partly used to repurchase $256 million of the bank’s $300mn Eurobond due in May 2018 (coupon 6.875%), implying new cash of $144mn and outstanding value of $44.50 million.
“Fidelity was a beneficiary of the high interest rate environment that prevailed in FY17; however, we believe its Net Interest Income in 4Q17 will be pulled lower by the interest expense on its recently issued $400mn Eurobond (maturing in October 2022, coupon 10.5%). The new cash introduced from the bond raise will be used to drive trade financing activities, according to management,” Renaissance Capital analysts led by Olamipo Ogunsanya said in a Feb 5 report on the sector.
Guaranty Trust Bank (GTBank), the largest lender by market value, has $276.93 million in outstanding Eurobonds due November 8 2018 and Zenith Bank has $500 million in Eurobonds due April 22 2019.
Diamond Bank has $200 million in 5 year unsubordinated unsecured Eurobonds maturing on May 21 2019 and First Bank of Nigeria Plc has $300 million in Eurobonds, maturing on August 7 2020.
“I think the need for dollar liquidity has reduced considerably compared to the last 2 years, due to improved FX availability in the domestic market. So banks are not necessarily under pressure to re-issue these bonds as they mature,” said Kayode Tinuoye Portfolio Manager/Head of Research at United Capital Limited.
“The outlook appears positive at the moment, and should ease any pressure on pricing, especially as most of the banks have decent credit risk ratings,” summed Tinuoye.
The Nigerian economy is recovering slowly from its worst slump in around 30 years, triggered by the 2014 collapse in crude prices.
Ratings agencies also downgraded the Nigerian sovereign at the height of the oil shocks.
However, a rebound in oil production on the back of relative peace in the Niger Delta region and the adoption of a flexible exchange rate policy that eased dollar shortages were responsible for the country existing a recession as GDP expanded by 0.55 percent and 1.42 percent in the second and third quarter of 2017, according to the National Bureau of Statistics (NBS).
Nigeria’s external reserves have hit a 4 year high of $42.50 billion, according to recent data from the Central Bank of Nigeria (CBN).
Benchmark sovereign bond yields have fallen to 13.10 percent as at February 2018 from 17.10 percent high of 2015 as the economy continues to improve.
Ayodeji Ebo, managing director and CEO of Afrinvest Securities Limited says based on the expected rate hike by the U.S Federal Reserve, they expect that any re-issuance by banks will be more expensive.
“So banks will now have to decide whether to pay off the loans as at maturity or if they have the dollar lending opportunity, they may decide to reissue new ones at the prevailing rates,” said Ebo.
Since the dollar is a global reserve currency, changes in its valuation can have a tremendous impact on everything from foreign reserves at global central banks to corporate balance sheets containing dollar-denominated debt.
“GTBank says it will only redeem and they may not issue new ones. But Diamond Bank is bit of a worry. Recently, they issued a $200 million Eurobond,” said Okunrubonye.
BALA AUGIE
