Nigeria’s new Eurobond yield to near 10% on oil

Any new dollar borrowings embarked upon by the Nigerian sovereign will be the most expensive since the country’s return to the overseas bond market in 2011 as a result of the worsening macro outlook and lower oil prices.

The country’s first $500 million Eurobond issued in 2011 priced at the mid 5 percent range.

Analysts tell BusinessDay that dollar denominated bond yields of blue chip Nigerian corporates have spiked, implying that the yield investors will demand from the sovereign will also move higher for any potential new issuance.

“Nigeria’s 2023 Eurobond currently trades at 8.6% (665bps above US Treasuries). Assuming the Nigerian authorities were to sell a new 10-year instrument; investors would require a premium to compensate for the maturity extension over the 2023 Eurobond, but also a new issue premium and possibly a premium to reflect the larger issue size,” Samir Gadio Head of Africa Strategy and FICC Research at Standard Chartered Bank, London, said in response to questions.

“This could bring the pricing to low-to-mid 9% territory, given current market conditions. Low oil prices, declining FX reserves and pressure on the FX regime will likely weigh on the pricing, but investors will probably take note of Nigeria’s relatively low external debt levels.”

Nigeria’s Federal Government has announced a record budget for 2016, forecasting a doubling of the deficit to N2.2 trillion ($11 billion) intended to help the country adjust to the downturn in oil, which has lost around two-thirds of its value since mid-2014.

It plans to borrow as much as N900 billion abroad to fund the deficit, which is equivalent to 2.16 percent of gross domestic product (GDP).

The country gets almost 70 percent of government revenue and 95 percent of export earnings from oil sales.

Nigeria’s foreign exchange reserves declined by 15.61 percent year-on-year to $29.13 billion by Dec. 29 from $34.52 billion a year ago, data from the Central Bank of Nigeria (CBN) show.

The country’s Long-term foreign currency Issuer Default Rating (IDRs) ranking at Fitch Ratings is three levels below investment grade at BB-.
The price of OPEC’s basket of 13 crudes, including Nigeria’s benchmark Bonny light stood at $31.79 dollars a barrel on Monday.

It could be tricky forecasting where any new dollar borrowings by Nigeria would price, as it depends on a lot of factors at the time of issuance, including the level of oil prices, global risk sentiment and U.S Federal reserve interest rate actions.

Angola, another major African oil producer like Nigeria issued a 10-year Eurobond at 9.5 percent in early November which is currently trading at 10.7 percent (873bps above equivalent US Treasuries).

The sell-off in the Angolan USD bond (since issuance) reflects lower oil prices and risk-averse investor positioning towards African issuers, analysts tell BusinessDay.

Looking at where the dollar bonds of blue chip Nigerian corporates trade for a clue to potential pricing for a 2016 sovereign issuance provides a mixed picture.

First Bank’s 2021 Eurobond (a subordinated Tier-II bond) currently yields 15.4 percent; GTB’s 2018 bond is at 9.4%.

Fidelity’s 2018 bond trades at 15.5%, Access Bank’s 2021 bond (a subordinated Tier-II bond) is at 14.1%, while Zenith Bank’s 2019 Eurobond trades at 9.7%.

By definition, a sovereign Eurobond will have a lower spread over US Treasuries than corporate Eurobonds adjusting for the maturity.

Gadio says Nigerian authorities will likely proceed with the Eurobond issuance, given this year’s large financing gap, they may be tempted to wait for a window of opportunity in the market or a partial rebound in the oil price, to minimise external funding costs.

Meanwhile, the International Monetary Fund (IMF) says Nigeria needs more flexibility in setting monetary policy, so it can use its foreign currency reserves to support the poor population if low oil prices persist.

“With a very clear ambition to support the poor people of Nigeria, there could be added flexibility in the monetary policy, particularly if, as we think, the price of oil is likely to be lower for longer,” said IMF Managing Director Christine Lagarde in Abuja, after a closed-door meeting with President Muhammadu Buhari and members of his cabinet.

The naira has been all but fixed at 197-199 per dollar since early March.

The CBN has curbed foreign-exchange trading and introduced import controls after the naira fell to a record low, as crude prices plunged.

“Clearly, the authorities should not deplete the reserves of the country simply because of rules that could be exceedingly rigid,” Lagarde said. “I’m not suggesting that rigidity be entirely removed, but some degree of flexibility will be helpful.”