The Special Purpose Vehicle of Guaranty Trust Bank Plc (GTB Finance B.V. Netherland) on 12 May, 2011 offered USD 500 million of 5-year unsecured senior debt with a coupon of 7.50% in the 144a private placement market. We take a cursory review of the offer and its implication on the equity of the bank.
Overall, we are positive on the leverage but remain Neutral on the ordinary shares.
Pleas find below highlights of the offer;
7.75% yield is more bearish than our expectation: The US 5-year Treasury Note, which we believe is a proxy benchmark for the issue, trades at 1.80%. Hence, the 7.75% yield-to-maturity (coupon of 7.5%) on the instrument stands at a 595bps spread to the benchmark yield. Informed by our view of a 5.25% - 5.50% justified yield on a hypothetical 5-year Nigerian Eurobond (10 year Nigerian Eurobond currently yields 6.1%), we had expected GUARANTY Eurobond to settle between 6.75% and 7.00% (an average of 510bps Spread to the US Treasury Note benchmark and 150bps premium to our hypothetical 5-year Eurobond). In gauging the global risk perception/sentiment on the domestic economy, we review the performance of the Nigerian Eurobond, given our belief that this cursory analysis will enrich our guidance on a justified cost of borrowing for GUARANTY.
Comparables justify our view of undervaluation:We observe that comparable emerging market banks’ debts have rallied over the same period (shedding an average of 30bps in yields). In our opinion, this trend signifies that the resilient growth momentum in the emerging economies coupled with swift recovery and global integration of the financial sectors will continue to attract international fund flows. Relying on our comparables (the table on page 1), our assertion of the undervaluation of the 7.75% yield on GRTBNL 7.5% 05/19/2016 is reinforced, as these comparable emerging market banks currently trade at an average yield of 7.1%.
…still, it is a free-ride on sluggish global recovery: While our comparables justifies our view of the relative undervaluation of the offer (some 50bps yield above our expectation), it is apt to note that GTBank took a modest free ride on the mixed global recovery (which has protracted the low global international interest rate environment). More importantly, this new issue is some 75bps tighter than the bank’s off-the-run issue which has a fixed rate of 8.5%. On our estimate, the bank’s cost of borrowed funds (8.5% Eurobond, 13.5% December 2014 Naira bond and dues to Local and Multi-lateral Institutions) stands at an average of c.9%. Looking at the lower cost of refinancing the Eurobond which is a 60% weight in the bank’s debt portfolio, we see a modest 65 basis points decline in the average cost of debt for the bank; an expected 10bps impact on overall cost of funds.
More wealth building blocks for equity holders: In our opinion, the lower refinancing cost will complement the diversifying funding base towards lower cost deposits (CASA) to mitigate the impact of the rising deposit rates and thinning asset yields on net interest margin. More importantly, we believe the dollar funding will enrich the foreign currency balance sheet position of the bank and thus enrich its cross-border trade finance and subsequent growth in commission on turnover and letters of credit transactions.