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Eurobond Issuance: Dovish Outlook for FI Yields

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Wednesday, December 06, 2017 / 10:25 AM /ARM Research

Late November, Nigeria accessed the global debt market for the 4th time1 raising $3 billion her largest single issuance on record. The issuance was split into the 10-year and 30-year series of $1.5 billion apiece bearing coupon of 6.5% and 7.625% respectively.
 

Notwithstanding the recent ratings downgrade by Moody and interest normalization in the US, the offer was oversubscribed with orders in excess of $11.4 billion (bid-cover of 3.8x). The general confidence of the market reflects more comfort with Nigerian dollar risk because of improving oil prices even as the economy continue to show signs of stability2, as well as investors preference for high yield emerging market risk assets.
 

Comparing the cost with recent issuances especially that of Egypt’s 10-year and 30-year bond at rates of 6.65% and 7.95% respectively, the issue looks relatively favorable.

So far in 2017, the FG has net-issued ~N1.36 trillion (over 100% of budgeted domestic borrowing), split between net T-bill issuance: N379 billion, and net bond issuance: N985.2 billion).
 

Hence, the successful Eurobond issuance of $3 billion, of which $2.3 billion is targeted at deficit financing, as well as the $300 million diaspora bond raised earlier in the year, displaces the need for domestic borrowings. On balance, this would mean moderated domestic borrowings for the remainder of the year and, by extension, sustained yield downtrend at the long end.
 

Tying it all together, we see a subsisting downtrend in the level and slope of the naira yield curve over the next six months with dovish monetary policy, lower domestic borrowings, and perhaps some form of coordination with monetary policy to ease financing costs to drive yields lower.
 

In terms of FX impact, the proceeds from the issuance should provide additional support for the FX reserve (up to $37 billion) and firmly supports the stability of the naira over the near term.


Proshare Nigeria Pvt. Ltd.

Related News from Economic Update - November 2017

1.   Budget 2018: Still a Long Stretch

2.    Capital Flows Riding the Ranges

3.   Q3 17 GDP: Oil Led Growth Mask Deceleration in Non-Oil

4.    Inflation: Soft Headline, But MoM is Firming

 

ARM’s H2 2017 Nigeria Strategy Report 

1.   NSR Q4 2017 (10) FI Strategy: Go Long but Be Mindful Of Duration Risk

2.   NSR Q4 2017 (9) Fixed Income: Yields Trend Lower As Apex Bank Changed Front

3.    NSR Q4 2017 (8) - Is MPC at a turning point?

4.    NSR Q4 2017 (7) - Inflation: Still an Eye into CBN’s Monetary Policy Mind

5.    NSR Q4 2017 (6) Naira Resilience: New Normal or Fleeting Reality?

6.    NSR Q4 2017 (5) - Balance of Payment to Survive Murky Waters

7.    NSR Q4 2017 (4) - Nigeria’s Net Creditor Status Diminishes Again

8.   NSR Q4 2017 (3) - Fiscal: Federal Revenue Growth Shows Signs of Life

9.      NSR Q4 2017 (2) - GDP: Uphill with the Handbrake On

10.   NSR Q4 2017 - Crude Oil: Will Crude Oil ‘Roller Coaster’ Linger?

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2.      Eurobond and The Headache of Pricing Sovereign Instruments

3.      Bond Market closes Bearish as CBN Signals Market with a “No sale” OMO Result

4.      Bond market turns bearish as CBN Sells N117bn T-bills

5.      Pricing of US$3bn Notes by Nigeria under its US$4.5bn Eurobond Programme

6.      Bond Market opens firmly Bullish as the FGN Launches its $3bn Eurobond Offer to Investors

7.      Fidelity Bank Successfully Issues $400 Million Eurobond

8.     Back to the Eurobond Market; DMO to Raise US$2.5bn by mid-November

9.      Federal Republic of Nigeria''s Proposed Eurobonds Assigned ''B'' Issue Ratings

10.  Eurobond: A Case Of Onshore-Offshore Arbitrage

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