As Zenith Bank relishes the oversubscription of its Eurobond issue, Obinna Chima looks at what this spectacular performance at the external bond market means for the brand and the economy
An increasing number of Nigerian banks are turning to the Eurobond market for capital, as they seek to take advantage of lower borrowing cost and rising demand among international investors. The growing interest in the dollar-denominated debt was, apparently, spurred by the successful outing of Access Bank Plc, which raised $300 million from the Eurobond market in the fourth quarter of last year. It was also, obviously, stimulated by the federal government, which in the first quarter of this year raised $1.5 billion in two tranches from the Eurobond market. This has prompted other banks, such as the United Bank for Africa Plc, which recently notified the Nigerian Stock Exchange of its plan to raise $500 million, to start considering Eurobond issue.
Already, the Debt Management Office has announced the commencement of a global offering of Nigeria’s first Diaspora Bond. DMO revealed that it had filed a registration statement for the bonds with the United States Securities and Exchange Commission. It said the application would be made for the bonds to be admitted to the official list of the UK Listing Authority and the London Stock Exchange Plc. The office said this was to ensure that the bonds were admitted to trading on the London Stock Exchange’s regulated market.
According to the DMO, “The bonds will be direct general obligations of Nigeria and will be denominated in U.S. dollars. The international Joint Lead Managers are Bank of America Merrill Lynch and The Standard Bank of South Africa Ltd.
“The Nigerian Joint Lead Managers are First Bank of Nigeria Ltd. and United Bank for Africa Plc.”
The DMO said there would be a series of investor meetings in the UK, the U. S. and Switzerland from June 13.
It said pricing was expected to occur following the investor meetings and subject to market conditions. The office stressed that Diaspora bond was used to raise funds from Nigerians in the Diaspora to finance capital projects and provide an opportunity for them to participate in the development of the country.
According to analysts, the low patronage and the high cost of raising capital from the domestic market are among the factors driving sovereigns and corporates to the international debt market.
Financial market analysts say the urge for the international debt market is largely buoyed by the surge in big ticket transactions in the country. The banks also intend to utilise the net proceeds of the notes for their general banking purposes.
Part of the allure is also the indication that interest rates in the euro zone are likely to stay at historically low levels for the foreseeable future as inflation remains tame. That means yields on debt sold in euros could stay low for longer and help issuers save money.
London is a major centre for the Eurobond market.
Zenith Bank Experience
Zenith Bank Plc recently issued a five-year senior unsecured benchmark Eurobond of $500 million on the Irish Stock Exchange, which broke new grounds with an oversubscription of more than 400 per cent. The bank had explained that the issue was in addition to its existing $500 million Eurobond, which matures in April 2019.
Subscription to Zenith’s latest Eurobond 2022 issue was $2.1 billion and it recorded landmark success on three counts: pricing, subscription and global appeal. Available details of the issue show that the subscription makes it the highest by any non-sovereign and non-supranational company in sub-Saharan Africa.
The bond was issued at par with both coupon rate and yield to maturity rate priced at 7.375per cent.
The 7.375 per cent pricing is 50 basis points better than the sovereign (Nigeria’s Eurobond) of 7.875 per cent. The rating of both the sovereign and Zenith Bank is B+ with the bond issue also rated B/B+.
“The 400 per cent oversubscription indicates a huge endorsement of the Zenith brand as a reputable, international financial institution recognised for superior performance and creating premium value for all stakeholders,” said the bank’s management in a statement.
The bond opened trading at 101.15 per cent of par value on its first day of trading, indicating the huge demand for the issue in the market. Sources close to the issue said the subscription came from around the world, including Hong Kong, China, Singapore, Europe and the United States of America, to further affirm the global acceptance of Zenith Bank as an international brand.
Sources familiar with the details of the issue also say over 200 investors participated, with the largest single ticket subscription being over $100 million. They point out that the overwhelming success of the issue attests to the visionary leadership of the institution and the consistent excellent track record of the bank over the last 26 years.
The bank established $1 billion Global Medium Term notes in 2014, with $500 million already raised in the first tranche. The first tranche notes were listed and admitted to trading on the Irish Stock Exchange in 2014. The net proceeds of the Second Tranche Notes would be utilised for its general banking business.
Implication for the Economy
Traditionally, banks have short-term deposits. Therefore, if they want to lend long-term using their current stocks of dollar, it would be a mismatch because that is short-term dollars and long-term loans. So, they try to lengthen the amount of liquidity they have.
The second reason is capital. The banks need tier-2 capital in order to support their balance sheets. The Eurobond market is the deepest source of liquidity in the world and tapping from the Eurobond market helps financial institution to benchmark their rating. This is because for any sovereign or institution to approach the international capital market, it has to meet very high standards of governance.
In addition, analysts note that the Nigerian banks, especially those in the tier-2 category. had sought to optimise the low-yield regime, especially as the demand for the dollar denominated loans increases in the domestic market, to shore up their balance sheets and maximise their capacity to join loan syndication clubs.
Research Analyst at FXTM, Lukman Otunuga, noted that the various successful Eurobond programmes were a demonstration of a high level of confidence in Nigeria.
“Nigeria seems to be on the correct path to recovery in 2017 with the impressively oversubscribed Eurobond deals boosting confidence towards the nation,” Otunuga said.
The federal government recently said the massive demand for Eurobonds from Nigeria was a demonstration of the strong market appetite for Nigeria and indicative of the confidence by the international investment community in Nigeria’s economic reform agenda.
But Otunuga pointed out that Nigeria still remained exposed to external and internal risks, saying, however, that the longer-term outlook for the country is positive.
The dollar-bond market is not likely to diminish, given that it is the world’s largest and most-liquid market. As such, it offers borrowers plenty of buyers and makes it easier for issuers, especially those selling large amounts.