Wednesday, September 22,
2021 / 5:50 AM / by Meristem Research/ Header Image Credit: iStock
Issue on Offer/Summary
The Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will be conducting a bond auction on Wednesday 22nd of September 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 August 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 1.55x, 2.10x, and 3.55x across the 13.98% FEB 2028, 12.40% MAR 2036 and 12.98% MAR 2050 instruments respectively.
Since the last auction, inflationary pressures have eased marginally (headline inflation fell to 17.01% in August vs. 17.38% in July 2021) due mainly to the impact of a higher base and harvest (supply) of key agricultural produce. Nevertheless, real investment returns remain firmly in the negative territory. This is however not expected to deter investors at the coming auction. The government on the other hand is less inclined to borrow from the domestic market due to the expectation of Eurobond issuance worth as much as USD6bn (or NGN2.48trn based on I&E rate as at September 20, 2021). In addition, the government seeks an additional external loan of USD4.05bn and EUR710mn from the World Bank, and other foreign sources.
In the secondary market for FGN bonds, average yield moderated to 10.62% as at September 20, 2021 from 10.93% (recorded on the date of the last auction), reflecting strong investor demand for bonds. Thus, the odds are in favour of a decline in rates at the next auction given that supply is expected to be weak relative to demand. However, government is expected to maintain the original coupon rates on the instruments on offer. Please see the table below for our recommended bid rates based on our analysis of the current yield environment.
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 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.