Bond investors warm to Nigeria Eurobond

Nigeria in need of funding to cover a record budget deficit, may take heart from the performance of its dollar debt as it prepares to tap the Eurobond market for the first time since 2013.

According to Bloomberg report monitored by Business247 News Online, gains in the nation’s U.S. currency-denominated securities drove yields to the lowest in 15 months, handing investors returns above the emerging market average this year. In contrast, local-currency bonds are the worst performers among peers, according to data compiled by Bloomberg. The dollar bonds have been helped by the clamor for yield as developed nations from the U.S. to Japan hold interest rates at or near record lows.

The performance of Nigeria’s dollar notes signals investors are comfortable the government has sufficient reserves to cover its foreign obligations. And high demand for Ghana’s Eurobond earlier this month bodes well for Nigerian Finance Minister Kemi Adeosun’s plan to issue $1 billion this year, according to NN Investment Partners in The Hague.

“There’s appetite for African risk,” Marco Ruijer, who oversees about $8 billion of emerging-market debt at NN Investment, including Nigerian Eurobonds, said by phone on Sept. 27. “They could do a deal quickly, even next week, if the oil price stays stable. And they could issue more than $1 billion if they wanted, depending on the price.”

Nigeria is he continent’s second-biggest oil producer, and relies on crude for 90 percent of exports. The 50 percent slump in oil prices since 2014 has left the government with a funding shortfall of 1.8 trillion naira ($5.7 billion).

Yields on Nigerian securities due in July 2023 have dropped to 6.61 percent from a record 9.37 percent on Jan. 15, a gain of 23 percent for bondholders in the period. That compares with average profits on emerging market sovereign Eurobonds of 16 percent, according to Bloomberg indexes. Nigeria’s local-currency securities, meanwhile, have lost 7.7 percent this year, the only debt to decline in 31 emerging markets tracked by Bloomberg.

Nigeria last sold a Eurobond in July 2013. A deal this year would come in the wake of West African neighbour Ghana’s sale of $750 million of debt on Sept. 8, which was more than four times oversubscribed. Nigeria would probably have to offer a yield of around 7.25 percent to 7.35 percent on a $1 billion 10-year bond, and closer to 7.5 percent on a bigger deal, Ruijer said.

Investors would be forgiven for steering clear. The economy IS set to contract 1.8 percent this year, according to the International Monetary Fund. Oil production has fallen to AN about a three-decade low as militants bomb pipelines in the Niger River delta, and Islamist militant group Boko Haram’s insurgency has left people in the northeast of the country facing the world’s worst food shortages, according to the United Nations Children’s Fund.

But with $24.6 billion of reserves, investors aren’t concerned that Nigeria would default on its $1.5 billion of outstanding Eurobonds. Its debt is equivalent to 13 percent of gross domestic product, the lowest among major economies in sub-Saharan Africa, according to the IMF.

The dollar bonds “could easily be redeemed from existing reserves and are even more easily serviced, at a cost of $91 million annually,” Alan Cameron, an economist in London at Exotix Partners LLP, which recommends that clients hold the securities, said in a note on Sept. 26. “If Nigeria took full advantage of the current sentiment and liquidity conditions globally, we think it could easily issue $2 billion.”

Not all investors are convinced the securities yield enough to make up for the risks. While Nigeria may have little debt, the downturn has hammered its revenue and it could end up spending as much as 35 percent of income servicing its interest obligations, including naira bonds and loans to multilateral lenders, according to the Budget and National Planning Ministry.

While Nigeria’s debt levels are low, its debt-service costs relative to government revenue are relatively high compared with those of other oil producers sch as Angola and Gabon, Ken Colangelo, a fixed income economist at AllianceBernstein LP, which oversees almost $500 billion of assets, said in an interview in New York on Sept. 19. That “makes the credit less solid and does not justify the much tighter spreads,” he said.

Angola’s bonds due in November 2025 yield 9.53 percent, while those of Gabon maturing in June 2025 have yields of 8.25 percent

There should still be enough demand to ensure Nigeria’s deal goes smoothly, according to Lagos-based Vetiva Capital Management Ltd.

“This is a relatively good time for Nigeria” to tap the market given the rally in its bonds since January, Michael Famoroti, an economist at Vetiva, said by phone on Sept. 26. “We will be expecting a yield of somewhere around 7 percent.”