Tuesday, January 19, 2021 / 11:06 AM / by FBNQuest Research / Header Image Credit: DMO
The Debt Management Office (DMO) issuance calendar for Q1 '21 shows that it will offer the same menu of FGN bonds at each auction. It is to offer its existing 10, 15 and 25 year benchmarks to raise NGN40bn-NGN50bn from each reopening in each of the three months. (At Wednesday's opening auction of the year, the DMO is now looking to collect NGN50bn from each benchmark). We understand from local media coverage of the approved 2021 budget for the FGN that the projected deficit of NGN5.60trn is to be covered by new borrowing of NGN4.68trn (half domestic and half external but all, we assume, through the DMO), multilateral and bilateral loans of NGN0.71trn and privatisation receipts of NGN0.20trn. The deficit was NGN5.20trn in the FGN's initial proposals but increased on the intervention of the National Assembly.
The domestic funding target of NGN2.34trn, if confirmed, is highly challenging. For 2020 the DMO was set a revised target of NGN1.60trn. It raised NGN1.66trn (gross) from FGN bonds over the 12 months, to which we must add a successful second sukuk and savings bond sales.
The DMO's calculations will allow for the maturity in July of a FGN bond paying a coupon of 14.50%. The outstanding value of the issue is currently NGN560bn.
It may wish to front-load its issuance of bonds. By banking sale proceeds at the start of the year, it insures itself against subsequent unwelcome surprises. Last year the DMO raised NGN409bn at the auction in January, and created some room for manoeuvre for itself. Sales then slowed, amounting to NGN560bn in the first quarter.
The challenge for the DMO requires the usual heavy lifting by domestic institutional investors, principally the PFAs. Their holdings of FGN bonds amounted to NGN7.38trn at end-November, equivalent to 60.0% of their assets under management (AUM), according to the latest monthly report from their regulator (PenComm). The yields on the bonds narrowed by up to 400bps in H2 '20 yet it remains the case that the pension funds have few investment alternatives with which they feel comfortable. Local money market securities are the only other asset class to account for more than 10% of their total AUM (14.6%).
In the ideal world, the DMO and its counterparts like to plan their issuance with fewer global and domestic uncertainties. The direction of the Covid-19 virus and of the crude oil price probably top the list of grey areas.
The FGN may choose to revise what we understand to be the current 50/50 split between domestic and external borrowing through the DMO in the 2021 budget. The federal finance minister has been quoted as saying that the FGN will not issue Eurobonds if local financing is more favourable. At least for long maturities the curves are fairly similar although we have to make allowances for the fx risk.
Plans would also have to change if the FGN struggled to secure the projected NGN0.71trn in external loans from multilateral/bilateral sources. To repeat a point dear to us, tapping the Eurobond market is a faster and less stressful process (although more costly) than accessing such loans, particularly if they come with policy strings attached.
In a future quarterly issuance calendar, the DMO will tempt investors with some new benchmarks and surely create some savings for the FGN. The coupons on its existing FGN bonds range up to 16.50%.