July 16, 2021 / 04:15 PM / By Meristem Research / Header Image
Issue on Offer/Summary
The Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will be conducting a bond auction on Monday 19th of July 2021. Bonds worth NGN150bn across the following instruments re-openings) will be on offer.
13.98% FGN FEB 2028 NGN50bn
12.40% FGN MAR 2036 NGN50bn
12.98% FGN MAR 2050 NGN50bn
Current Yield Analysis
At the last PMA, marginal rates across all the instruments on offer declined as anticipated. The DMO offered 12.74% (vs. 13.10%), 13.50% (vs. 14.00%) and 13.70% (vs. 14.20%) on the 2027, 3035 and 2050 instruments, respectively. Investor appetite increased along the curve as the 2027, 2035 and 2050 instruments were oversubscribed by 32.42%, 154.90% and 347.64% respectively.
Clearly, investors were most interested in the 2050 instrument, an indication that there is a general expectation of a decline in interest rate. This expectation is supported by moderating inflation rate, and FGN's precarious income position which bears on its capacity to offer higher rates. Oil receipts have been largely underwhelming stemming from OPEC+ quota while expenditure continues to rise. The outlook for FGN's fiscal position is further challenged by rising concerns for a third wave of the coronavirus across the world and the discovery of the delta variant (more contagious variant of the virus) in Nigeria.
Average bond yield in the secondary market declined to 11.70% as at 16th July 2021 from 11.88% as at the date of the last auction. The bullish sentiment flows from the general expectation of lower interest rates (as discussed earlier). While we note the pressure on interest rates, we do not think that the current downward trend in yields is sustainable in view of the slow pace of moderation in inflation rate and the implication for real rates of return. This is in addition to FGN's growing fiscal deficits and need for domestic financing.
Bond Absolute and Relative Valuation
In valuing the 13.98% FGN FEB 2028, 12.40% FGN MAR 2036 and 12.98% FGN JUL 2050 re-opening offers with the current yield curve as the basis for discounting, we arrived at the following fair value, implied yield and an IRR for the instruments:
Our valuation gives a fair-trading price ex coupon payment, the expected return on the bond considering its periodic interest payments and the expected return on the bond's periodic payments. We analysed the issues on offer given the current yield environment, market liquidity, as well as a review of the recent past auctions, whilst also introducing market sentiment factor into our valuation, on which we advise bid yield ranges for the issues on offer.