Tuesday, August 17, 2021 / 8:10 PM / by Meristem Research / Header Image Credit: ARM Securities
Issue on Offer/Summary
The Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will be conducting a bond auction on Wednesday 18 th of August 2021. The indicated total amount to be on offer is NGN150bn. All instruments on offer are re-opening issues.
13.98% FGN FEB 2028 NGN50bn
12.40% FGN MAR 2036 NGN50bn
12.98% FGN MAR 2050 NGN50bn
Current Yield Analysis
The Debt Management Office (DMO) held its monthly auction in July 2021 where it offered NGN150bn on the 2028, 2035 and 2050 instruments collectively. The instruments on offer were oversubscribed with bid to cover ratios of 1.13x, 1.47x, and 3.13x across the 13.98% FEB 2028, 12.40% MAR 2036 and 12.98% MAR 2050 instruments respectively. This is reflective of robust investors' appetite despite persistent high inflation and the consequent negative real returns.
At the coming auction, we do not expect stop rates to trend higher as we think that the federal government is less inclined (relative to much earlier in the year) to borrow domestically. Our thoughts are based on two main factors. Firstly, the government's plan to raise USD6.20bn in Eurobonds implies that c.87% of outstanding deficits (including deficit from the supplementary budget) can be financed with proceeds of the issuance, leaving c.13% to be financed via local borrowing. Furthermore, the ease in production cuts which took effect in August 2021, should translate to higher oil receipts and a generally better revenue outlook over the near to medium term.
Meanwhile, in the secondary market for FGN bonds, average yield moderated to 10.93% on 16 th August 2021 from 11.45% (recorded on the date of the last auction). In our opinion, the bullish streak reflects strong investor demand and liquidity, in addition to a general expectation of sustained decline in interest rates over the near term.
Bond Absolute and Relative Valuation
In valuing the 13.98% FGN FEB 2028, 12.40% FGN MAR 2036 and 12.98% FGN MAR 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 instrument
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.