Issue on Offer/Summary
The Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will be conducting a bond auction on Wednesday 24th of March 2021. The indicated total amount to be offered is NGN150bn. All instruments on offer are re-opening issues.
16.2884% FGN MAR 2027 NGN50bn
12.5000% FGN MAR 2035 NGN50bn
9.8000% FGN JUL 2045 NGN50bn
Current Yield Analysis
At the last Primary Market Auction (PMA) held in February 2021, marginal rates `were increased across all offered instruments in line with our expectations. Marginal rates on the 2027, 2035 and 2045 instruments were increased to 10.25%, 11.25% and 11.80% from 7.98%, 8.74% and 8.95% respectively at the previous auction as investors continued to demand higher rates.
Although we see further scope for increase in rates, judging by historical standards, we are concerned about how far the government will be willing to go given the precarious nature of its revenue and its already high debt service burden. We however note that oil receipts have trended upwards so far in the year given the movement in oil price from USD51.80pb at year-end 2020 to an average of USD61.04pb in Q1:2021. The current trajectory of inflation also presents a compelling case for higher rates at the next auction.
Meanwhile, selloffs in the secondary market persist, driving yields higher. Since the last PMA, the average bond yield has risen to 9.44% (as of March 19, 2021) from 9.21% (recorded on the date of the last auction). We maintain that while PMA rates continue to trend higher, the sentiment in the secondary market will remain bearish as investors seek to participate at the PMAs. We also note that inflows from non-bank OMO maturities (which contributed to strong demand witnessed last year) are no longer available to drive demand in the secondary market.
Bond Absolute and Relative Valuation
In valuing the 16.2884% FGN MAR 2027, 12.5000% FGN MAR 2035 and 9.8000% FGN JUL 2045 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 both issues on offer.