- •$500m FGN Bond to be paid in currency of offer
The Federal Government has entered into an irrevocable commitment that it shall on no account convert or repay the principal amount and interests on its ongoing $500 million maiden foreign-currency denominated domestic bond in naira.
The Series I $500 million Domestic FGN US Dollar Bond, which opened on Monday, August 19, 2024, is scheduled to close on August 30, 2024, with settlement on September 6, 2024. Minimum subscription is 10 units or $10,000, with additional investments in multiples of one unit or $1,000 thereafter.
It is a five-year bond, with bi-annual interest payment in currency of issuance and a coupon or interest rate of 9.75 per cent per annum. The bond will be listed on the Nigerian Exchange (NGX) and FMDQ Securities Exchange.
According to the Trust Deed for the $500 million bond, the Federal Government pledges an irrevocable commitment that it shall keep fidelity to the nature of the bond as a dollar-based issuance, with both the principal and the coupon to be paid in the currency of issuance.
The Trust Deed is the binding and enforceable legal agreement between the Federal Government and subscribers to the $500 million bond. The bond has no independent rating as it carries the sovereignty of the Federal Republic of Nigeria, and thus shares Nigeria’s sovereign ratings.
Subscribers are expected to start earning interests on their investments in dollars from September 06, 2024, the settlement date, with payment for the first half expected in early March, 2025 and another in September, 2025. Redemption or payment of the principal amount invested shall be in September 2029. However, investors can trade on their holdings at the NGX and FMDQ, providing liquidity to existing investors and accessibility to other broad range of investors.
Under the guidelines for the $500 million bond, all subscribers shall be duly identified in compliance with extant rules and protocols against money laundering and illicit financial flows. All individual Nigerian subscribers, whether resident in Nigeria or abroad, are required to provide both Bank Verification Number (BVN) and National Identification Number (NIN).
The Debt Management Office (DMO), which oversees government’s debt issuances, clarified that Nigerians in Diaspora who have no BVN and NIN should apply for these identities as they are prequalification for subscribing to the dollar bond.
All corporate or institutional investors are required to provide information on country where the entity is incorporated as well as residency classification, while such corporate application must bear the corporate body’s seal and be signed in accordance with the company’s signature mandate by duly authorised officials.
Pension or provident funds are required to ensure that that applications are in line with the guidelines of the National Pension Commission (Pencom) on custody of pension assets.
The Nation had earlier reported that the dollar bond guidelines disallow cash deposits and naira conversion.
To participate in bond, all payment shall only be made into designated accounts through the banking system and electronic transfers.
According to the guidelines for the offer, no cash deposits will be accepted under the transaction, except where such cash deposits have been made into the domiciliary account for not less than 30 days prior to the date of the offer.
The bond is opened for subscription to all Nigerian residents, Nigerians with savings abroad, Nigerian Diaspora, qualified institutional investors and other groups of investors. Qualified institutional investors included banks, co-operative societies, fund managers, pension fund administrators, insurance companies, government agencies, staff schemes, non-bank financial institutions, trustees, custodians, investment/unit trust, stockbrokers and market makers.
Under the rules, payment is expected to be made within 24 hours upon receipt of allocation confirmation notice, with subscribers responsible for applicable transfer charges.
Individual applicants are required to provide evidence of full payment for the amount applied, full name, Biometric Verification Number (BVN) number, residency classification and regular signature.
Application from a group of individuals should be made in the names of those individuals with no mention of the name of the group.
An application by an illiterate person should bear his or her right thumb print on the subscription form and be witnessed by an official of the issuing house at which the application is lodged, who must first have explained the meaning and effect of the application to the illiterate person in his or her own language. The witness should indicate his or her name and signature also on the form.
Besides the interest rate of 9.75 per cent per annum, the $500 million bond also qualifies for tax exemption for pension funds and other investors. It has also been granted liquid assets status by the Central Bank of Nigeria (CBN), implying that banks can use such investments in calculation of their liquidity ratio (LR). Trustees and pension fund administrators can also invest in the bond. It is considered as risk-free with the sovereignty and credit of Nigeria as guarantee.
Market consensus had described the bond pricing as highly attractive, building up expectations that the bond may be oversubscribed.
Preliminary book-building reports from sources close to the issuance had indicated that there were strong possibilities of a substantial oversubscription. The bond’s structure allows government to absorb oversubscriptions within the limit of the programme’s total size of $2 billion.
Market sources said the restrictive guidelines for the bond were aimed at forestalling money laundering and conversion of naira to dollars. The government also aims at blocking illicit funds and unidentified sources.
Market sources said the pricing was in alignment with the current yield of Nigeria’s Eurobond of equivalent tenor. Nigeria’s Eurobond of between three and five years currently yield between 9.662 per cent and 10.03 per cent, thus the mid-point pricing of 9.75 per cent is considered attractive.
The bond has potential to attract large number of foreign investors, according to most analysts.
“For foreign investors, the price is attractive when compared to yield in United States, Germany, Japan and United Kingdom. The risk premium for Nigeria’s sovereign risk is adequate,” a senior investment banker stated.
Sources had said there were notable enthusiasm for the first sovereign dollar-denominated domestic bond, with interests cutting across domestic institutional and individual investors, portfolio funds and Diaspora community.
“I think it’s possible. If you look at the universe of potential investors that will be eligible to participate. There is a report that says the dollars held in domiciliary accounts in Nigerian banks are in excess of $20 billion. This represents potential investors.
“There are also lot of very active foreign-currency-denominated mutual funds that are also potential investors. There are also Nigerians in diaspora who are currently earning less than nothing on their investments that will find investing in this dollar bond quite attractive in terms of returns. Lastly the foreign portfolio investors are also not precluded from investing, and this should also boost patronage. So the chance of an oversubscription is possible,” said a senior investment banker with specialty in debt issuances.
Another source said the emerging macroeconomic outlook is encouraging to investors, who may seek the opportunity of the dollar issuance to lock in value.
The net proceeds of the inaugural issuance would be used mainly for investments in critical sectors of the economy in line with the national economic developmental agenda.
Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, while unveiling the $500 million bond in Lagos, said the launch was a bold step towards economic transformation as it would further attract both local and international investors.
He explained that the bond issuance would further expand the Nigerian financial system while providing the country opportunity to tap the huge resources of its Diaspora community.
According to him, with the bond issuance, Nigeria will be able to access foreign currency held by Nigerians abroad, as well as other international investors who believe in the macroeconomic reform initiatives spearheaded by the Tinubu administration.
“This historic initiative is aimed at raising a minimum of $500 million from both local and international investors, marking a significant step in Nigeria’s ongoing economic reform and development efforts,” Edun said.
He pointed out that the financial market thrives on creativity and innovation, adding that it is essential to encourage investors to participate in this strategic opportunity.
He highlighted the positive outcomes already being seen from the current economic policies as seen in increased government revenue, improving trade balance, ongoing capital expenditures, stability in naira and the foreign exchange market and the taming of inflation among others.
He noted that the government is working to permanently address the problem of food insecurity by revitalising the agricultural sector through mechanisation, expansion of agricultural participation and investments in emerging opportunities.
Edun highlighted the government’s successful interventions to reduce inflation and poverty, such as the removal of levies on food imports and the direct transfer of funds to the most vulnerable citizens.
He underscored the importance of dollar funding, particularly in stabilising the exchange rate, which he said is vital for the country’s economic stability.
Addressing the challenges faced by African nations in the international capital markets, Edun explained that the rating systems often do not favour the continent, while assuring that Nigeria aims to take the lead in building domestic and international confidence.
According to him, with the historic bond launch, t Nigeria is poised to become a continental financial hub, where other African nations can raise capital and drive economic growth.
Experts were unanimous on the historic importance and benefits of the new bond issuance.
Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said Nigeria has a strange position of having significant number of its citizens having huge deposits of dollars in domiciliary accounts earning nothing and not really contributing significantly to economic activity.
He said the bond provides a platform for those seemingly idle funds to be invested and get good returns while still enjoying the hedging advantage of holding a reserve currency.
“This instrument also provides the Federal Government the much needed dollar liquidity for the forex market which hopefully will lead to the strengthening of the naira. This could ultimately have a positive knock-on effect on inflation and consequently interest rates. This is also a positive move for the capital markets as it increases product variety and liquidity within the market,” Amolegbe said.
Managing Director, AIICO Capital, Dr Femi Ademola, said the domestic foreign currency denominated bond is in fulfillment of the promise by the government to attract funding from Nigerians in diaspora.
According to him, the bond allows Nigerians to invest their foreign currency in dollars thus removing the fear of a loss of value due to naira devaluation.
“The success of this issuance will be a confidence boost for the country and the current administration. It would also allow the government to channel the remittances into more profitable ventures for investors. In terms of impacting the financial market, the effect will be the same as the issuance of Eurobonds. The instruments would be tradeable in the market this deepening the market further,” Ademola said.
Managing Director, HighCap Securities, Mr. David Adonri, explained that the domestic dollar bond will enable domiciliary account holders to earn good income on their generally non interest yielding deposits in Nigerian banks.
He said the bond will reduce capital flight since interest payments will be retained in the local economy.
“Generally, it is an attractive investment outlet for domestic investors who have been yearning for investment in dollar denominated assets locally. It will deepen the country’s capital market,” Adonri said.
Professor of Capital Market at the Nasarawa State University and President, Association of Capital Market Academics of Nigeria, Prof Uche Uwaleke, yesterday said there were expectation that the pricing of the bond would be attractive enough to lure a broad category of prospective investors.
He said a high demand for the debut bond would embolden the government to further explore the domestic dollar bonds market which will reduce government’s incursion into the naira bond market, thereby freeing up capital for the private sector.
While describing the $500 million, five-year tenured bond as ambitious, Uwaleke, who preferred shorter tenor and size, said the bond issuance holds a lot of promise to investors and the economy in general in several ways.
According to him, the inaugural forex bond provides an opportunity to earn risk-free return on investments given that dollar deposits with banks attract little or no interest. The interest payable to bondholders is exempt from income tax.
He said the issuance would afford retail and institutional investors opportunity to diversify their portfolios while providing an alternative cheaper source to meeting government’s financing needs in a period where the cost of servicing domestic debt is made more expensive by hawkish monetary policy.
“It should help to strengthen the naira since the dollars raised will be available for intervention in the forex market. It promises to deepen the capital market following increased liquidity in the market on the back of the new asset class. Like the debut Eurobond issuance in 2011, the maiden domestic dollar bond is expected to open up local issuance of similar bonds by companies and sub-nationals.
“All said, the benefits of the domestic dollar bonds outweigh the costs. It is expected that the net proceeds will be ring-fenced and invested in critical sectors of the economy such as agriculture, education and health,” Uwaleke said.
Managing Director, APT Securities & Fund, Mallam Kasimu Kurfi, said the $500 million bond issuance was a welcome development and the market would expect to see more of such.
