First Bank of Nigeria Limited, the largest subsidiary of the FBN Holdings has announced plans to exercise its option to call the $300m 8.25 per cent subordinated notes raised from the international debt markets before the due date of August 2020.
In the notice to the Nigerian Stock Exchange (NSE) signed by the company secretary Seye Kosoko; the FBN Holdings said First Bank, seeks to call and pre-pay holders of the note at the next callable date of August 7, 2018.
“The bank took the decision as a liquidity management exercise, just as it demonstrates the strength of First Bank’s foreign currency liquidity and robust capital base, while further enhancing the efficiency of the balance sheet,” Bank statement said.
Despite its Eurobond being among the riskiest in Nigeria, First bank’s Eurobond was among the best dollar denominated corporate bonds raised by Nigerian Banks in 2018 of CCC ratings, closely behind Diamond Bank of B- Eurobond rating. Ayodeji Ebo, ceo of Afri-invest Securities Limited said the early move by the Bank is a strategic and good business decision because it is very expensive recalling a bond at this time when yield are rising in the United states.
“They are recalling which means that they are paying the debtors off based on the current yield environment,” Ebo said.
A eurobond is a debt raised by an institution or government which is denominated in a currency other than the home currency of the country or market in which it is issued. Ebo added, “If they are going to raise new debt, it will be at a higher rate.”
Fitch Ratings said last year that the return of Nigerian banks to the international bond markets, marks “a small step towards, reducing maturity mismatches between foreign-currency (FC) assets and liabilities.”
Renewed interest from international investors seeking yield enabled several banks to issue Eurobonds since late 2016, for the first time since 2014, albeit at higher yields, following rating downgrades in the intervening period. In most cases, the issuance will boost foreign currency funding, rather than simply refinance maturing dollar debt.
The devaluation of the naira in mid-2016 however caused debt servicing problems, as borrowers reliant on naira revenue streams struggled to find additional funds to repay rising foreign currency obligations. Loan restructuring typically involves a two- to three-year maturity extension, pushing out final maturities to 2019 and beyond.
The rush for Eurobonds have been boosting the capital position of Nigeria banks as well as their dollar liquidity, following the difficulties experienced in 2016 by most banks, in opening new letters of credit, as dollars dried up in the system. Many of the banks have also being engaging in swap arrangements with the Central Bank of Nigeria (CBN) with the dollar raised through the Eurobond, helping boost the country’s external reserves.
Nigerian banks have traditionally operated with significant maturity gaps, funding longer-term loans with short-term customer deposits, as is the case in many emerging markets. For foreign currency liquidity, there are no prudential limits put in place by the CBN.
The CBN regulatory liquidity ratio (requiring banks to hold liquid assets equivalent to 30percent of total deposits) is focused exclusively on naira liquidity. There are regulatory limits to control open FC positions in banking and trading books, but these targets the management of market risk and its potential impact on banks’ capital rather than liquidity risk.
The term of bank lending has gradually lengthened since 2012 when Nigeria opened up opportunities for investment in the oil sector. Fitch estimated that about half of all bank loans are medium-term, with maturities of three to four years. These are largely in foreign currency.
This is a high share for a low-rated market where banks have limited access to longer-term foreign currency funding. Foreign currency term loans have undergone considerable restructuring last year and this year, particularly among oil-related borrowers facing cash flow constraints given weak oil prices and disruptions in production.
