Nigeria takes to bond markets to finance investment

Debts markets in Nigeria have traditionally been dominated by sovereign issuances, but as demand for African bonds continues unabated, an increasing number of Nigerian banks are looking to tap into rising investor sentiment to expand their financing options.

Demand for African sovereign and corporate debt was expected to slow as the US began to taper its quantitative easing programme, but as a recent slew of oversubscribed bond issuances from Kenya and Cote d’Ivoire have shown, investors are still very keen to buy up paper from the continent, albeit with some distinctions.

Nigerian banks, which have increasingly been looking to debt markets to raise financing, appear set to get a boost as Standard & Poor’s manager for sub-Saharan Africa, Konrad Reus, announced in July that the agency expected to rate a number of Nigeria’s banks for the first time this year, as companies look to follow successful bond issues by the state.  

Banking on bonds

In May Diamond Bank raised $200m from its first Eurobond issue, in five-year notes with a coupon of 8.75%. The float had previously been postponed due to adverse market conditions and was scaled down from an initial plan to offer $550m.

Since 2007, five Nigerian banks have issued Eurobonds, and Diamond’s offer took the amount outstanding to $2.55bn – up from almost nothing seven years ago, but still relatively small given the size and growth of Africa’s largest economy. The scope for further issues is considerable, given the comparatively strong fundamentals of Nigeria’s banking sector following the recovery from a domestic banking crisis in 2008. Lenders are looking to tap into robust growth in the oil and gas sector, particularly with a growing number of indigenous Nigerian firms taking an increasingly active role in the industry.  

Sovereign issues

While corporate issuances are on the rise, the Nigerian government is also planning a return to the bond markets. Successful bonds from other major African markets -- including Kenya, which raised $2bn with a bond that was four times oversubscribed at rates of between 5.875% and 6.875% – have highlighted the continued demand for African debt, and prompted a number of other countries to explore new issuances. Ghana, for example, is considering issuing a new Eurobond before the end of summer.

While Nigeria’s budget deficit has recently narrowed to 1% of GDP following rebasing, the need for long-term funding in the country – particularly in terms of capital expenditures – means that there may be more bond floats in the pipeline.

On June 30 Abraham Nwankwo, director-general of Nigeria’s Debt Management Office, which manages the country’s bond issues, told Reuters that Nigeria planned to issue bonds worth between $100m and $300m targeted at the diaspora by the end of the year. But he added that it had no plans for regular sovereign dollar bond issues.

There are, however, further plans for issues in the local currency. On July 31 Reuters reported that the sovereign had opened books on issues worth $50m to $70m of naira-denominated global depositary notes. The bonds came in two tranches, one maturing in 2017 with a guidance price of 11.35%, and another with 2022 maturity and a guide price of 12.25%.  

Ratings and rankings

One of the problems that Nigeria faces in using debt markets to raise capital for investment (or to bridge budgetary gaps generally) is that it is still rated three levels below “investment grade” by the three major ratings agencies: Standard & Poor’s, Moody’s and Fitch. This effectively bars its debt to many funds which are allowed to invest only in higher-grade assets. However, Nigeria still has strong appeal to less risk-averse buyers. It ranks reasonably well compared to other countries in the same ratings band, and its strong economic outlook may see it move upwards over the longer term.

In April Fitch affirmed Nigeria’s long-term foreign and local currency issuer default ratings as BB- and BB, respectively, with stable outlook. This reflects the fact that Nigeria is fairly secure in the near-term, but faces some serious structural challenges and downside risks. The agency noted positive factors such as Nigeria’s tighter monetary and fiscal policy, low indebtedness, high growth, current account surplus, and improving diversification. On the other hand, downsides come from low levels of foreign direct investment as a proportion of GDP, poor governance, a patchy performance on reform and a degree of risk from the Boko Haram insurgency in the north.

Sovereign ratings also play into private sector debt issues, which tend to trade somewhat above government yields, and which are expected to be of growing importance over the coming years as Nigerian companies and institutions look to diversify their means of raising capital, and tap into international investor enthusiasm for the country’s expanding economy.

While a risk-off move could cut demand for Nigerian sovereign and corporate bonds, the longer-term outlook for the economy suggests that further issues are likely. Enthusiasm for Nigeria is still quite closely linked to the price of oil, and if the current relatively high level is sustained, some of the downside effects of the international environment may be offset in the near term as well.

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