Foreign currency liquidity challenges to reignite banks’ appetite for Eurobonds
The current foreign liquidity challenges in Nigeria could be an incentive for banks to make a swift return to the Eurobond market as customers are in dire need of foreign currency.
Between the last issuance and now, there has been a moderation in the interest rate on the back of dovish stance by banks across the globe in response to the headwinds brought on by the coronavirus pandemic.
“They should be able to raise at a lower cost. But they must look for customers who can pay interest on loans,” said Gbolahan Ologunro, equity research analyst at CSL Stockbrokers Limited.
First Bank of Nigeria, the largest subsidiary of First Bank of Nigeria Holding (FBNH), is poised to tap the international debt market, with the pricing of a senior five-year note expected in coming days.
Analysts at Chapel Hill Denham Limited said given that the United States five-year treasury yield is currently at 0.3 percent, they expect the issuance to price between 7.3 percent and 8.0 percent.
That compares 7.4 percent yield-to-maturity of Ecobank Transnational International Bank (ETI Bank).
There were early rapid redemptions of Eurobonds by Nigerian banks two years ago on the back of little demand for currency loans, low-interest-rate environment, and currency devaluation.
In 2019, three Nigerian banks redeemed $1.1 billion worth of outstanding Eurobond notes before maturity.
“Defunct Diamond and Zenith matured without refinancing in 2019, and another tender offer was conducted by Zenith Bank to reduce its
Eurobond obligations’’ said analysts at Chapel Hill Denham Limited.
Nigeria, Africa’s largest economy, has $11.20 billion Eurobond outstanding with a yield of 6.60 percent, and the World Bank has delayed $1.50 billion facility on the grounds that policymakers have refused to adopt a unified foreign exchange rate.
The Nigerian Treasury Bill Yields ( NTB) crashed following the decision by the central bank in October last year to restrict individuals and Nigeria’s corporates from participating in both primary and secondary markets of its Open Market Operation (OMO) window.
The central bank dovish tone suggests yield will be suppressed in a long while, as it cut key interest rate to the lowest in four years over concerns of a looming recession may be insufficient to boost growth.
In September, the apex bank lowered the rate to 11.50 percent from 12.50 percent.
As a result of the Covid-19 disease that triggered unanticipated global financial market volatility, domestic economic growth in the first quarter (Q1) 2020 slowed to 1.87 percent.
However, the International Monetary Fund (IMF) improved its 2020 forecast for Nigeria by 1.1ppts to a 4.3 percent year on year (y/y) contraction compared with 5.4 percent previously.
The regulator has expressed concerns on the outlook for the country’s external reserve and exchange rate, thanks to worsening current account balance, decline in oil price, and risk aversion on the part of investors which would affect capital inflows.
A backlog of FX demands has piled up in Nigeria since March, estimated at $2.5 billion by the CBN in August.