Kayode Tokede
Following a surge in prices, yields on Nigeria’s Eurobonds tumbled as investors’ demand in the secondary market persisted since the beginning of the month of November 2022, latest data by Debt Management Office (DMO) has revealed.
Experts attributed the hike in prices to the Naira redesigning policy of the Central Bank of Nigeria (CBN) as high network investors are demanding risk-free instruments to preserve their wealth in foreign currency.
“Once there is high demand in Eurobond, the prices will be increasing and the yield will drop. Part of the reasons for lower yields on Eurobonds could be the recent policy of CBN on Naira redesign, ”said a finance expert who pleaded anonymity.
Analysis of the DMO data revealed that the price of 6.375% $500m JUL 2023 Eurobond that opened November 1, 2022 at $97.892 and 8.525 per cent show its price increasing to $99.444, while its yield dropped to 6.203 per cent as of November 10, 2022.
Also, 10-year 7.875% $1.5bn FEB 2032 Eurobond that opened in November with a yield of 14.725 per cent dropped to 12.417per cent in the period under review.
Speaking with THISDAY, analyst at PAC Holdings, Mr. Wole Adeyeye noted, “If the Eurobond price is going up, certainly, the yield will drop. The recent rating by Moody that downgraded Nigeria’s local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2, placing them on review for further downgrade. The downgrade is also playing role in the Eurobond yields we have witnessed recently.”
According to THISDAY investigation, the yield on Nigeria’s Eurobond opened 2022 at 7.989 per cent and increased to 14.908 per cent in October 2022.
Debt analyst who also pleaded anonymity attributed the hike in yield to the factor of demand and supply.
According to him, “A lot of Central banks around the world are increasing their rates. The US Fed has increased the interest rate this year and when the lending rate in US increases, you will have to compensate investors in your local market. Eurobonds are bought by international investors and the investors have options where to put their money. When the interest rate in their local market starts to move up, they prefer to keep money in emerging markets.”
He added that, “If the demand for emerging market starts to reduce because interest rates at their local market are increasing, then, the price starts to drop and overall yield will increase. Interest rates are increasing in international markets and even in Nigeria, the CBN has increased interest rate twice.
“The hike in yield is meant to drive demand and supply in the Eurobond market. If the demand is slow, the price will drop and if the price comes down, yield goes up.”
Meanwhile, Nigeria’s 10-year Eurobond closed the first half of the year at a yield of 13.450 per cent or $69.857 in unit price pointing to one of the worst yields in years for Africa’s largest economy. The current price is now $65.220.
The bond carries a coupon rate of 7.875 per cent per annum, which is the interest received by original subscribers of the bond who prefer to hold to maturity.
The federal government had stated that it does not have any immediate plans to tap the Eurobond market due to the high yield environment on the back of the CBN increase in Monetary Policy Rate (MPR) to 15.5 per cent.
The Finance Minister, Zainab Ahmed had in June 20222 said the federal government shelved plans to raise about $950 million selling overseas bonds, owing to unfavourable market conditions during the time-frame approved for the fundraising.
The Minister had in April this year stated that the federal government planned to sell as early as May its second external debt in 2022 to help plug fiscal deficits. The planned $950 million bond sale would account for the balance of $6.1 billion overseas borrowing planned for 2021, after it raised the second tranche of $1.25 billion in March.
Also speaking, the Chief Executive Officer, Wyoming Capital and Partners, Mr. Tajudeen Olayinka attributed the mixed outcome in prices and yields to investors willing to hold Nigeria’s Eurobond in spite of the recent drop in Nigeria’s sovereign rating in the international capital market.
According to him, “It also tells us the level of risk investors are willing to take, given the paucity of dollar-denominated financial instruments that can be used to immunize exits from other instruments in Nigeria.
“They are likely to be local investors willing to immunize their investments in more stable foreign currencies or foreign currency-denominated instruments. Nigeria’s Eurobond, currently at a much higher yield, comes handy to those who are willing to take the risk.”
On his part, the Vice President, Highcap Securitas Limited, Mr. David Adnori said, issuing Eurobonds at this time in the market would cost the government more when it comes to paying back, stressing that the lack of Eurobonds also shuts out an important source of dollar inflows for the country.
