The Nigerian Bond Watch @ 030912 – DLM

Proshare

Monday, September 3, 2012 12:17 PM / DLM Research
 

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Analysis  
In our assessment of the market, we note the sustained influence of the proposed inclusion of Nigerian government bonds in the JP Morgan GBI-EM index on general market activities. As a result, secondary market trading was largely speculative. The maturity of the 9.50 31-Aug-2012 FGN bond worth c.N46.00 billion equally influenced market activities during the review week. Accordingly, there was continued intra-day volatility across all the actively trading bonds which resulted in a significant increase in prices.


The highest negative change in yield was recorded by the 10Y benchmark security with c.228bps, followed by the 5Y benchmark with c.187bps; the least change was seen in the 1M, with c.28bps. Consequently, the significant movement in bond prices has provided the tailwind for driving FGN bonds market capitalisation to an all-time high of c.N4.04 trillion (c.$25bn). (fig. 3)

At the sub-national level, Osun State intends to raise N30 billion (c.$187mn) in debt via the issuance of a 7-year bond; the security is being priced at a yield of 14.5%. The state plans to deploy issue proceeds toward improving its weak infrastructure, with emphasis on roads, schools and hospitals. Osun has a population of c.3.4 million and internally generated c.N11.9 billion (19.8% of total revenues) during the 2011 fiscal year. Like most states in Nigeria, Osun depends largely on budgetary allocations from the federal government for the significant proportion of its funding. As at December 2011, 80.2% of the state’s total revenues of N60.1 billion came from revenue allocation from the federal government. Given that we have not observed any marked change in the state’s funding structure, we believe the bond will be issued on the back of the “irrevocable standing payment order” (ISPO) repayment structure used by all but one state – Lagos state – in Nigeria in view of the states’ dependence of federal budgetary allocations. As at June 2012, Osun state had an external debt stock of $61.74 million (c.N9.9bn) (fig.4) – the 8th highest amongst Nigeria’s 36 states – compared to the fact that the state is in the bottom quartile in revenue terms.

We are equally inclined to highlight the downward review of the long term national rating of Dana Group of Companies Plc to BB+, from BBB, by Global Credit Rating (GCR) (fig. 9) Dana Group of Companies Plc consists of seven companies – excluding Dana Air – that are co-obligors to the N8.01-billion bond issued in 2011. The primary considerations that led to the downgrade include the company’s highly geared balance sheet, low interest coverage during the review period and rising interest rates amongst others. 
 

In the week ahead, there will be a Treasury bills and OMO bills maturity worth c.N143 billion and c.N30 billion respectively. Also expected is Treasury bills issuance worth c.N143 billion. However the market is expected to maintain current liquidity levels.


LAST WEEK:
The Nigerian Bond Watch @ 27812 – DLM
 

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