Oil rally breathes life into Nigeria Eurobonds after difficult March

Nigeria Eurobonds are almost unrecognisable from when they were being dumped by investors at a frantic pace in March 2020, but they now have a resurgent oil price to thank for the dramatic change in fortunes.

The yields on Nigeria’s 2032 Eurobond have collapsed to a one-year low of 6 percent as prices rallied to $110 on Wednesday, January 27, according to Bloomberg data. That marks a turnaround from last March, when yields on the same Eurobond were as high as 12 percent, doubling the current yield, and prices slumped to a record low of $60.

Bond yields are inversely correlated to their underlying prices. This means that the lower the price of a bond, the higher the yields. A falling bond price/rising yields is often associated with higher risk consideration while a rising bond price/falling yields is a sign of strong investor appetite.

Nigeria’s resurgent Eurobonds have higher oil prices to thank for the turnaround.

“Eurobonds have been doing very well since November when oil retested $35 per barrel,” said Egie Akpata, a director at Lagos-based UCML Capital.

In the thick of the COVID-19 pandemic and a price war between Saudi Arabia and Russia, which forced a global economic slowdown and roiled the market, crude oil prices fell to a record low in March, with the West Texas Intermediate – a type of crude oil – turning negative as suppliers paid buyers to accept oil deliveries they didn’t immediately need.

The oil price crash left Nigeria, which relies on oil receipts for the single largest chunk of its dollar income, terribly exposed and that soured appetite for its dollar-denominated bonds, otherwise called Eurobonds.

Oil prices have however turned the corner since then as global lockdowns were eased and factories re-opened.

Building on a gradual rebound that started last May, Brent crude, the benchmark oil grade, climbed to $56 per barrel Wednesday, the highest in 10 months.

That was after industry data showed US crude stockpiles fell unexpectedly last week, and China, the world’s second-biggest oil user, reported its lowest daily rise in Covid-19 cases, bolstering hopes of a pickup in demand.

The US Energy Information Administration (EIA) expects Brent crude oil prices to average $53 per barrel in both 2021 and 2022, an optimistic outlook that bodes well for Nigeria Eurobonds in 2021.

More importantly, the benign outlook for oil prices and the falling yields on Nigeria Eurobonds presents an opportunity for the Federal Government to tap the market to fund its 2021 budget.

The current favourable conditions mean Nigeria can raise a fresh Eurobond at lower interest rates.

The Federal Government plans to raise N2.3 trillion from external sources to fund part of a budget deficit of N5.6 trillion in 2021.

The government had planned a Eurobond issue early last year to fund its budget deficit and refinance the $500 million Eurobond before it decided to defer the sale due to the turmoil caused by the Covid-19 pandemic.

The West African country held its last Eurobond sale in 2018, its sixth in such issue, where it raised $2.86 billion.

Patience Oniha, director-general, Debt Management Office (DMO), said this year that the government was monitoring the terms of foreign bonds.

Faced with record budget deficits in the aftermath of the pandemic, sub-Saharan African countries are expected to return to the Eurobond market this year.

The Republic of Benin has already completed a €1 billion bond issue on the international debt market this year, the first operation of its kind conducted by an African country since the beginning of the year.

The Republic of Benin government first issued €700 million at an interest rate of 4.8 percent with a maturity of 11 years. The remaining €300 million was issued with an interest rate of 6.8 percent and a maturity of 31 years.