Investors are currently rushing government securities and going by the oversubscriptions that followed each of the Eurobonds issued in Nigeria by both the Federal Government and corporate organisations, one may not be wrong to say that Eurobonds seem to have become a household name and a darling of bond investors in Nigeria and those that want to take advantage of the relatively high yield environment in Nigeria. Even those who are not investors in the Eurobonds are wondering what Eurobonds are and how they can join the growing list of investors.
Eurobonds are simply bonds that are denominated in a currency other than that of the issuer. They are not necessarily denominated in Euros as the name implies.
For example, the Federal Government of Nigeria’s (FGN) 6.75 percent $500 million January 2021 Eurobond is a bond issued by the Federal Government of Nigeria in Nigeria but denominated in US Dollars. Those who buy do so in dollars, with the interest and principal repayment conducted in equally in dollars.
Choosing between corporates and Government Eurobonds
Worthy of note is that Eurobonds come from government and corporate sources. As such, a prospective investor has to decide whether to buy FGN Eurobonds (government) or Cadbury and Access Eurobond (corporate). Corporately issued Eurobonds may offer higher interest than government issued ones, but they also offer higher risk, implying that the higher the risk, the higher the returns.
How to invest in Eurobonds
The process of investing in Eurobonds in Nigeria does not differ from that of an ordinary bond. Basically, FGN bonds and indeed, FGN Eurobonds can be bought at the primary market at the initial offer level or at the secondary market for an existing bond. The process entails completing the Tender for Federal Government of Nigeria Bonds’ form, submitting same through any of the authorized dealers and making the required payment when the bid is successful.
However, like every other investment, buying Eurobonds should be a well thought out process and not a mere avenue to join the bandwagon of Eurobond investors. It is advisable to review and understand the risk profile of any Eurobond being considered for purchase.
Usually, when bond issues open as primary issues, the relevant document contains a list of the banks or brokers that have been contracted to sell the bonds.
In Nigeria, FGN issued bonds are purchased via Primary Dealer Market Makers (PDMMs). There are banks appointed by the Debt Management Office of Nigeria, (DMO), to act as authorised dealers in FGN bonds. Each of them has its operational strengths and weaknesses including the turnaround period, responsiveness to clients, and client service excellence.
The banks or brokers may differ in their commissions and other charges as well; so, pay attention to that as you evaluate which one to put your deal through. Doing some research on some of the brokers or banks, if you have not dealt with them before, will be helpful in selecting which to use for your bond trade.
Having selected the broker or bank, it is time to complete the required purchase order forms and instructions on what account to debit for the purchase.
The last process then is waiting and getting a confirmation from your bank or broker that your purchase has been successful.
Invest According to Risk Appetite
Different bonds (Eurobonds inclusive) have different risks characteristics, just like different investors have different risk appetite and tolerance. A prospective buyer of Eurobond should weigh the risk characteristics of the Eurobonds in relation to the amount of risk he or she is willing to stomach. Government bonds are backed by the full faith of the government.
Most Eurobonds come with credit ratings, which act as a measure of their quality and risk profile. An AA rated bond is of higher quality than A-rated bond. An AA rated bond, in all intents and purposes, offers more security and stability and, therefore, pays lower interest than an A-rated bond. Hence a new investor must pay attention to the credit rating of the issuer and the bond itself as well as the credibility of the rating agency giving the rating.
Eurobonds present advantages to both the issuers and investors alike. By issuing Eurobonds, government and corporate issuers get access to international markets that would not ordinarily have been accessible.
It also helps corporate issuers especially, to manage their balance sheet in that it allows them to obtain funds in foreign currency which helps them create foreign currency denominated liability that could be used to match their foreign currency denominated assets.
Eurobonds present investors with the benefit or possibility of achieving a higher yield on investments, and with yield in Nigeria being so high in relation to other countries, this advantage stands to be proven.
There are disadvantages that go with Eurobonds, the major of which is foreign exchange/currency risk. This is the risk that an asset or investment denominated in a foreign currency will lose value as a result of unfavourable exchange rate fluctuations between the investment’s foreign currency and the investment holder’s domestic currency.