The Federal Government has valued its offering of $2.5 billion dual series Eurobond Note, comprising a $1.25 billion 12-year series and a $1.25 billion 20-year series, at the rates of 7.143 per cent and 7.696 per cent. The offering is expected to close on February 23, subject to the satisfaction of various customary closing conditions and the proceeds used to refinance domestic debts. COLLINS NWEZE writes that the Eurobond offer – Nigeria’s fifth issuance – would assist the country in achieving an optimal mix between domestic and international debts. It will, besides, reduce debt service cost.
Since its first bite at the benefits of foreign capital in 2011, Nigeria has remained a regular patron of the International Capital Market (ICM).
Besides coming at an attractive interest rate, borrowing from the ICM emboldens the domestic economy and offers opportunity for private companies to source funds from global investors.
The recent announcement by the Federal Government to raise $2.5 billion via Eurobond to refinance domestic debts and reduce its soaring debt service costs has been seized as another opportunity for global investors.
The issuance of the Eurobond was part of the public debt management strategy carefully-crafted by the Debt Management Office (DMO) to acess the ICM to diversify the country’s source of funding its developmental programmes as well as introduce the country into the highly disciplined international funds markets.
It all started in January 2011 when Nigeria made its debut in the ICM through the issuance of $500 million 10-year Eurobond. Since then, the confidence of investors in Nigeria’s bond has been on the increase. Most of the funds previously generated were used to upgrade power infrastructure, which the country badly needs for its economic growth and development.
The DMO has been advising government on terms and conditions of loans, restructuring and refinancing while maintaining a complete and accurate database of all government borrowings among other roles.
It was therefore a welcome development when the Federal Government after consulting with global investors last week, announced that it has priced its offering of $2.5 billion aggregate principal amount of dual series notes under its Global Medium Term Note Programme. The notes comprise a $1.25 billion 12-year series and a $1.25 billion 20-year series.
The 12-year series will bear interest at a rate of 7.143 per cent. The 20-year series will bear interest at a rate of 7.696 per cent, and, in each case, will be repayable with a bullet repayment of the principal on maturity. The offering is expected to close on or about February 23, 2018, subject to the satisfaction of various customary closing conditions.
According to the DMO Director-General, Ms. Patience Oniha, the Federal Government intends to use the proceeds of the notes for the refinancing of domestic debt. The notes represent the country’s fifth Eurobond issuance, following issuances in 2011, 2013 and two last year.
Ms. Oniha said the offering has already attracted significant interest from leading global institutional investors with a peak order book of over $11.5 billion. When issued, the notes will be admitted to the official list of the United Kingdom Listing Authority and available to trade on the London Stock Exchange’s regulated market.
According to the DMO chief, Nigeria may apply for the notes to be eligible for trading and listed on the Nigerian FMDQ OTC Securities Exchange and the Nigerian Stock Exchange (NSE).
She said: “With the successful pricing of our fifth Eurobond, Nigeria’s status as an Issuer of Eurobonds with a strong and diverse investor base has been further consolidated. This time, Nigeria has priced a new 12-year bond at a yield of 7.143 per cent and a 20-year bond at a yield of 7.696 per cent, both of which are consistent in price with our existing portfolio.
“I am particularly pleased that the issuance will enable us to refinance a portion of our existing domestic debt portfolio, with external debt at considerably lower cost.
“The impact of the process has already led to a reduction in the cost of domestic borrowing. And so, a double benefit for the cost of our broader debt portfolio. Lower domestic rates will also benefit corporate borrowers.”
Speaking on the offer, Finance Minister Mrs. Kemi Adeosun said the pricing was determined following a series of short meetings and conference calls with investors.
According to her, Nigeria is focused on reducing the cost of our debt portfolio and ensuring we have the optimal mix between domestic and international debt.
Ms. Oniha said: “The proceeds of the issuance, which would supplement the issuances we completed in 2017, will be used to re-finance domestic debt, which is high cost and short term, with lower-cost international debt, with a longer tenure. We will have a range of Eurobonds in issue, encompassing 5-year, 10-year, 12-year, 15-year, 20- year and 30-year bonds, giving investors a full basket of options to participate in.”
Nigeria’s foray into ICM
The government has sold dollar bonds twice – the first was in 2011 when it raised $500 million through Eurobonds and subsequent two issuances in 2013 when it raised $1 billion of five and 10-year debts to finance budget deficits.
The country has constantly enjoyed good patronage from international investors. For instance, $1 billion Eurobond offer held in February 2017 was oversubscribed by nearly 800 per cent. The $1 billion Eurobond was issued at 7.875 per cent yield and 15-year tenor to support infrastructural developments in road, railway and power. The oversubscription surprised not a few pundits. The offer, which comes at $200,000 denominations and multiples of $1,000 denominations, will mature on February 15, 2032, with Citigroup Global Markets Limited and Standard Chartered Bank. Stanbic IBTC Capital is the Financial Adviser.
A currencies’ analyst at Ecobank Nigeria, Olakunle Ezun, said the oversubscription of the bond reflected continued confidence in the country’s economic prospects despite exchange and inflation rates challenges.
Ezun said fund managers dominated the allocation of the bond with United States (U.S) investors accounting for most of the demand.
He said: “For some of us that believe in Nigeria, people think that we are joking. Despite the inflation and exchange rate worries, Nigeria was still able to get a good bargain. It gives me the hope that the economy will soon rebound.”
Explaining how overdependence on crude oil has robbed the country of many opportunities, he said: “All we need to do is just diversify the economy from crude oil. If we had used the oil revenues efficiently, we should not be importing fuel and the savings from that alone will lift the economy speedily.”
Ezun said that with an estimated 190 million population and good demographics, Nigeria remains a savvy investors’ destination.
Former Keystone Bank Executive Director Richard Obire, said the risk of investing in the country was still low, and the Organisation of Petroleum Exporting Company (OPEC) and non-OPEC countries have been co-operating to moderate the prices of crude oil.
The DMO said Nigeria’s low debt to Gross Domestic Product (GDP) ratio meant that the country can borrow more to fund its budget, infrastructure and other essential projects that will stimulate the economy and create jobs.
The floating of the Eurobond is part of the planned Federal Government’s Medium Term Note (FGMTN) Programme (2016 to 2018) and it is expected to help the government bridge deficit in this year’s budget.
The Director-General of West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, explained that budgetary allocations alone may not be enough to finance the country’s infrastructure deficit.
He said: “With the current political will to tackle corruption and the desire to find a solution to the infrastructure problem in the country, there is need to channel fresh investments into power supply, roads, the railway and other social amenities.”
To him, the continued slide in government revenues, its plan to provide tangible assets like housing, power (electricity), transport, education, communication, and technology, may be hampered by paucity of funds. Hence, the need to borrow from the global capital markets to fund key projects.
Other analysts urged the government to focus more on external borrowing, and less on local borrowing, insisting that the foreign debt is cheaper. Describing borrowing as not a bad idea, they advised that borrowed funds must be used for infrastructure and raise the competiveness of the economy.
They stressed the need for adequate monitoring to ensure that borrowed funds were deployed to projects they were meant for.
Eurobond issuances
Nigeria is not alone in the Eurobond race. Many African countries have successfully raised cash from the ICM. This issuance of Eurobonds has gained momentum in recent years as countries seek to lock in favourable rates from the market.
For Nigeria, the successful issuances of three Nigerian Sovereign Eurobonds in the ICM, one in 2011 and two in 2013 – have opened the window for the private sector to raise the required foreign currency funds.
Local banks and other companies are now able to fund long-term real sector projects in agriculture, manufacturing, housing, mineral exploration and processing, infrastructure for diversified and sustainable economic growth towards employment generation and poverty reduction.
Afrinvest West Africa Limited Managing Director Ike Chioke said contrary to the sell-offs recorded in the local bond market the previous week, sentiment was bullish last week as yields trended 12 basis points lower Week-on-Week to an average of 13.8 per cent across tenors at market close on Friday on the back of improved investor appetite. The rate at the local bond market is therefore far higher than the rates at the ICM.
Chioke said the government announced the pricing of its $2.5 billion dual tranche Eurobond offering to complete the $5.5 billion external debt programme approved by the National Assembly last year.
He said the pricing was largely successful as both instruments offered (12-year and 20-year series) drew impressive buying interest from leading global institutional investors with a peak order book of over $11.5 billion.
The Afrinvest chied said the proceeds from the Eurobond issuance would be used to refinance relatively expensive short-term domestic borrowings as the government plans to achieve an optimal mix of domestic and foreign debt and reduce overall debt servicing cost.
Chioke said the impact of the debt refinancing, coupled with declining inflation rate and stability in forex rate, is anticipated to continue to anchor yield expectation lower in the near term and reduce crowding out of private sector borrowers.
DMO’s perspectives
Investors, hungry for higher returns in a low interest rate environment, reckon that Nigeria’s benign debt levels, recovering foreign exchange reserves and a potential yield above seven per cent, as reasons for investing in the country.
Ms. Oniha attributed the success to foreign investors’ appetite for Federal Government’s instruments.
The DMO chief, who oversaw the successful issuance of the country’s first Sovereign Sukuk of N100 billion, gave further details.
She said: “The DMO had for several years raised funds for the government largely in the domestic market through Federal Government of Nigeria (FGN) Bonds and Nigerian Treasury Bills (TBs), and to a limited extent, from external sources mainly the multilaterals.”
She explained that while this had a beneficial effect of developing the domestic debt capital market, the government became the dominant issuer to the extent that it has been regularly accused of crowding out the private sector.
Ms. Oniha said: “The outcome was obviously not intentional, but to remedy the situation. The DMO deemed it fit to shift some of the borrowing activities to the international financial markets.
“This is also in line with its debt management strategy of achieving a portfolio mix of 60 per cent domestic and 40 per cent external. Through the strategy, the share of domestic debt has been brought down from over 85 per cent to 77 per cent as at September last year.”
Speaking on the benefits expected from borrowings, she said: “The DMO’s role in financing budget deficits as provided in Annual Appropriation Acts (AAA), are to support budget implementation and the attainment of the government’s economic targets”.
She said the fresh borrowings from the ICM will not, in any way, worsen the nation’s debt burden.
She said: “I want to re-assure Nigerians that the government’s borrowings are pre-approved by the executive and legislative arms of government and are used to finance various activities of the government as appropriated.
“These layers of approvals ensure that the borrowings are both necessary and scrutinised before the DMO embarks on actual borrowing.
“The increasing focus by the current administration of using borrowed funds for infrastructural development is a step in the right direction”.
She further explained that as borrowing is deployed to infrastructure to promote economic growth, the benefits of job creation and increased production among benefits are good for all Nigerians.
“Interestingly, government’s revenue is now being given proper attention. The measures to increase revenues are already yielding some results, and as this trajectory continues, the need for borrowing is expected to reduce while debt service will become an increasingly smaller portion of revenue,” the DMO chief said.
