With 780% Oversubscription of Eurobond, Nigeria’s Economy Remains Resilient, Attractive

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Lekki-Ikoyi Link bridge…. an example of modern infrastructure project

Kunle Aderinokun

Not even the recession plaguing Nigerian economy could deter international investors from patronising the $1 billion Eurobond issued by the federal government last Thursday.

Investors swooped on the bond, which the federal government sold at the international market to raise $1 billion to finance capital expenditure and deficit in its budget, subscribing to it about eight times over. Given the success of the $1 billion Eurobond issue, which was subscribed to in excess of $7.8 billion, translating to an oversubscription of 780 per cent, analysts have posited that the development showed that the Nigeria’s economy is still resilient and attractive to foreign investors.

The $1 billion Eurobond, which is a borrowing with an annual coupon of 7.875 per cent over a period of 15 years is a third issue by the federal government with February 16, 2032 as maturity date for repayment on the principal. The precursors were issued in 2011 and 2013. The $1 billion Eurobond issued under Nigeria’s newly established Global Medium Term Note programme.

The government has said the offering attracted significant interest from leading global institutional investors.

The notes would be admitted to the official list of the UK Listing Authority and available to trade on the London Stock Exchange’s regulated market.

“Nigeria will apply for the notes to be eligible for trading and listed on the Nigerian FMDQ OTC Securities Exchange and the Nigerian Stock Exchange,” finance ministry said in statement.

According to the Minister of Finance, Mrs. Kemi Adeosun, who spoke with journalists at the conclusion of the transaction, “The Eurobond is part of our funding strategy for our 2016 capital expenditure and will be spent on key infrastructure projects, in line with our economic plan.

“Over the last two weeks, I have been privileged to lead a strong delegation including the Minister for Budget and National Planning, the Central Bank Governor, the DG of the Debt Management Office, the DG of the Budget Office and representatives of the National Assembly to engage international investors and we’ve been very pleased with the response. The investment community understands the strategy we are adopting and have been positive. That is reflected in the bond being almost 8 times oversubscribed.”

Adeosun enthused that, “The international capital markets are a key source of capital for us and our sovereign issuance provides a key benchmark for corporate borrowers looking to tap the ICM.”

“Ultimately, we want to achieve an optimal mix of borrowing from the ICM and other external sources, including concessional funding from the World Bank and China, as part of the 2017 budget process,” she added.

This latest development has attracted the attention of economic analysts and market watchers, who have rated the bond as appropriately priced and described the bond’s outing as a very exciting one.

According the Chief Executive Officer, The CFG Advisory, Adetilewa Adebajo, “The Nigerian Eurobond Offer at 7.8 per cent was appropriately priced to offset the risk rating, therefore the over subscription did not come as surprise.”

Adebajo explained that, “What this illustrates, is the attractiveness of the Nigerian Sovereign bond to Global institutional Investors and the Nigerian Sovereign can tap the International Financial Markets to diversify our government debt portfolio.”

Pointing out that, “The domestic treasury bonds still have very high yields at 22 per cent,” the economist noted that, “The focus therefore should be on achieving the right balance in our debt portfolio with diversifying in The Domestic Markets, Euro Bond Markets and Concessionary Finance from the Multilateral Agencies and Foreign Government Agencies, to reduce the current cost of debt service which takes out 35 per cent of our revenues.”

In his own analysis, Executive Director, Corporate Finance, BGL Capital Ltd, Femi Ademola, noted that, “The oversubscription and the very attractive yield of the FG 3rd Eurobond is a very exciting development.”

According to him, “This will lower the country’s risk profile and help corporate entities in Nigeria to attract foreign capital at good yields. It may also suggest that the economic recession is locally overrated.”

“However, I will say that the structure of the debt programme and its implications may have helped to improve its attractiveness and lower the risk profile.

“Firstly, the size of the offer is small. So that when compared to our foreign reserve and foreign earning capacity, the risk of default is considerably low. It could be a different risk profile if the size was $5billion or $10billion.

“Secondly, the tenor is comfortably low. A fifteen year term indicates that whatever the country is going through now, it is expected to have been resolved before the repayment of the loan,” Ademola added.

Ademola also noted: “Another important thing is that the loan is tier to capital expenditure in the budget, that is, social/economic investment which could in turn generate economic activities and attract tax revenue for the repayment of the loan. In other words, the application of the loan and the response from investors justifies the argument that debts are not a bad idea for public investment purposes.”

“In all, we must thank the Government team led by the Minister of Finance and congratulate them for a job well done,” he concluded.

In the same vein, Director, Union Capital Markets Limited, Egie Akpata, said it was not a surprise that the issue was oversubscribed.

Akpata noted that, “The level of oversubscription seems high but it only tells us that there was a lot of demand well above the final issue price of 7.875 per cent”, pointing out that, “Demand of $1bn at say 9 per cent only tells us that an investor is happy with Nigeria risk at that level.”

Contending that, “It is not a vote of confidence in the country or the economy,” Akpata said, “On the contrary, the pricing of this bond issue shows that not up to $1bn is out there for a Nigerian Eurobond at substantially lower than 7.875 per cent. This pricing is higher than what would obtain for a number of other similar rated emerging market sovereign issuers.”

Akpata explained: “It is worth noting that the only obligation of the Nigerian government for this issue is to pay the annual coupon of $78.75million. That is less than 1 day of oil output for Nigeria. There is virtually no chance that the FGN will have difficulty paying the coupon over the 15 year life of the bond. That is why the bond was always destined to ‘succeed’ where success means getting investors to buy the entire $1bn at a ‘reasonable’ price.”

“It would be instructive to review the bond’s trading performance after 1 month. It is very likely that some of that excess demand that missed out on the bond in the primary market will go into the secondary market to buy the bond and push its price up and hence reduce the yield it would fetch on the secondary market. Eventual yield of under 7.3 per cent in the secondary market would not be surprising,” he added.