Investors eyeing dollar returns can now participate in Nigeria’s domestic bond market as the government offers a lucrative 9.75 percent interest rate on a new $500 million bond.
The five-year bond, which carries a 9.75 percent interest rate, is the first tranche of a planned $2 billion issuance aimed at bolstering the economy.
Requirements for participation
The minimum investable amount is $10,000, with additional increments of $1,000 thereafter. This structure is intended to enable wider participation among investors both within Nigeria and the diaspora.
According to Kalu Aja, a financial expert, an intending investor needs a bank verification number (BVN) and the National Identification Number (NIN) if Nigerian, even from the diaspora. No cash is allowed.
Read also: Nigeria opens subscription for five-year domestic dollar bond at 9.75%
On the application form, it is stated that payment shall only be made through the Nigerian banking system and electronic transfers into the designated accounts to be provided upon allotment.
“No cash deposits will be accepted under this transaction,” the form says.
Size of the domestic dollar bond
According to Wale Edun, finance minister, the Federal Government aims to raise a total of $2 billion from the domestic dollar bond programme. However, it is only issuing $500 million in its series 1 programme.
Eligibility
Nigerians and non-Nigerians resident in Nigeria, Nigerians in the diaspora, and qualified institutional investors are eligible. Pension funds can also invest in the bond.
Issuance duration
The offer was opened for investors on August 19 and will close on August 30.
Tenor of the bond
The bond has a five-year tenor.
Interest offered
The government through the Debt Management Office (DMO) is offering returns of 9.75 percent per annum on the $500 million bond.
Aja explained that if anyone invests $10,000, they get $487.5 every six months for five years. This is apart from their principal – $10,000 – which will be returned to them.
Nigerian domestic dollar bond vs other investment options
Interest on the issuance is paid in dollars and it is tax free. “The interest is exempt from Company Income Tax, Personal Income Tax and Capital Gains Tax,” Aja further explained.
Gbolahan Ologunro, portfolio manager, FBNQuest, said for local investors, the returns on the domestic dollar bond at over 9 percent is better than what is attainable as interest on most domiciliary accounts.
Read also: Nigeria now aims to raise $2 billion in domestic dollar bond sale
“This is a good investment, as investors may want to hedge against the naira and earn dollar income,” he said.
Ibrahim Tajudeen, head of research and strategy at ChapelHill Denham, explained that for Nigerians in diaspora, it is also a great investment opportunity as it offers higher returns as opposed to what is attainable in the countries they reside, “where interest rate and yield on bonds are not more than three to four percent.”
Risks associated with investing in Nigerian dollar domestic bonds
The dollar denominated bond is a senior unsecured note backed by the full faith and credit of the Federal Government of Nigeria
Where is it listed?
The bond is listed on the Nigerian Exchange Limited and FMDQ OTC Securities Exchange Limited.
What will the proceeds be used for?
The net proceeds of the bonds and accretions shall be ring-fenced and invested in critical sectors of the economy to be approved by President Bola Tinubu on the recommendation of Wale Edun, minister of finance and coordinating minister of the economy, subject to appropriation by the National Assembly of the Federal Republic of Nigeria.
Who are the financial advisers?
The issuing houses for the bond are: Meristem Capital Limited, Stanbic IBTC, and Vetiva. United Capital is the lead issuing house.
The African Finance Corporation is also the global coordinator of the bond.
How is it different from local FGN bonds and Eurobonds?
Samuel Gbadebo, fixed income analyst at CardinalStone, explained that a domestic dollar-denominated bond is issued by the Federal Government through the DMO and sold to local investors such as Nigerians. Both coupon payments and principal repayments are made in dollars and are subject to Nigerian taxation.
Read also: FG’s dollar bond will stabilise naira, increase external reserves – Edun
Eurobonds, on the other hand, are issued by the Federal Government of Nigeria (FGN) and are denominated in dollars or other foreign currencies for foreign investors. Interest and principal repayments on these bonds are made in the respective foreign currencies.
“FGN bonds, on the other hand, are typically local bonds denominated in naira and issued to local investors. Coupon payments and principal repayments are conducted in naira and are subject to taxation in Nigeria,” he said.
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