Eurobond Issuance: Dovish Outlook for FI Yields


December 6, 2017/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.

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