Egie Akpata is the Chairman of Skymark Partners Limited, a Lagos-based firm. He has extensive experience in financial markets; having worked at BMO Financial Group in Toronto, Deutsche Bank AG in New York, United Capital PLC and UCML Capital Ltd where he is a director. In this interview with Vincent Nwanma, he discusses issues relating to Nigeria’s plans to return to the Eurobond market soon and why Africa’s top oil producer is likely to keep borrowing from the international capital market.
Is it not premature for Nigeria to talk about returning to the international capital market?
I do not think it is premature for Nigeria to return to the Eurobond market after issuing $1.25 billion in March. The sad reality is that the federal government is running a very large deficit which cannot practically be funded only from the local markets. Also, Eurobond yields have been rising, so the sooner Nigeria sells a new issue, the cheaper it would be relative to waiting till later in the year. The finance minister is reported to have mentioned a potential $950m bond issue in May or so. The issue would likely be successful, but pay a substantially higher rate than the recent March issue.
How well are Nigerian Eurobonds currently doing in the market to justify another bond offer so soon?
The justification for another issue is the need to fund the federal government’s deficit, and not because of the secondary market performance of existing Nigerian Eurobonds.
Yields of Eurobonds issued by African countries have risen substantially over the past six months. This means their prices have dropped as bond yields move inversely to prices. This is partly due to the run up in US government bond yields as the US Federal Reserve signaled to the market that it has to increase interest rates substantially to curb record inflation levels. Nigerian Eurobonds tend to yield over one per cent less than Egyptian Eurobonds of similar tenor and 4-11 per cent less than Ghanaian Eurobonds of similar tenor. So relative to two of the largest African Eurobond issuers, Nigeria still pays a lower rate.
How easy is it for individuals to invest in Nigerian Eurobonds; is it even advisable?
For most individuals, it is not advisable to invest directly in Nigerian Eurobonds. Most people would be best served investing in a SEC-approved USD or Eurobond mutual funds. The minimum trade size for a Eurobond is $200,000 face value, but some Eurobond mutual funds accept investments as low as $1,000. Clearly, the mutual fund threshold is more affordable to most people. Also, Eurobond prices have fallen substantially in the past six months. Investors in a dollar mutual fund that has Eurobonds and other USD assets are unlikely to have performed as badly as a direct Nigerian Eurobond investment due to more active management of the portfolio.
To be more specific, the 2029 Nigerian Eurobond issued in March at an 8.375 per cent yield has seen its price drop from 100 to 94 leaving investors; with a six per cent capital loss in only one month. The 2051 Nigerian Eurobond issued in September 2021 at an 8.25% coupon has seen its price drop from 100 to 76 leaving investors with a 24% capital loss in only 7 months. These are very material losses which can only be minimized by active trading and portfolio management which is difficult to achieve as a passive amateur investor.
How do Nigeria’s economic fundamentals measure against other Eurobond issuing African peers?
Due to the size of Nigeria’s economy and oil exports, the country has been seen as a good credit by Eurobond investors. Nigeria’s GDP growth rate has been competitive relative to other large Eurobond issuers like Ghana, Egypt or Angola. Relative to Nigeria’s GDP, our outstanding Eurobonds of $16.1bn is not as burdensome as Ghana’s outstanding $13bn with a GDP that is 20% that of Nigeria’s.
How much premium are we likely to be required to add to our existing notes to make our offers attractive enough?
New Eurobond issues always price above existing similar issues in the secondary market. This ‘new issue premium’ of 0.25-0.50 per cent is needed to encourage investors into bidding for this new instrument. The size of the premium varies depending on market conditions at issue, size and tenor of the new bond.
Can Nigeria really afford to service $16bn of outstanding Eurobonds?
The short-term cost of servicing Eurobonds is the annual coupon. The current annual coupon payments on Nigeria’s Eurobonds is $1.2bn a year. That is $100m a month which, based on oil exports, is affordable for Nigeria. The challenge is how bonds are repaid on maturity. Practically, new bonds will be issued to pay off maturing Eurobonds. For now, maturities are not a big issue for Nigeria. $300m matures in June this year and $500m in July, 2023. There is no maturity in 2024 or 2026. But from 2027 to 2033, maturities are around $1.5bn a year which will have to be paid off or refinanced with new Eurobond issues.
For how long can Nigeria keep going to the Eurobond market for funding before we run out of investors willing to buy our Eurobonds?
If Nigeria keeps issuing around $4bn a year of Eurobonds, the outstanding Nigerian government’s outstanding Eurobonds would double to $32bn in four years. That would still be less than the $35.6bn in outstanding Egyptian Eurobonds.
However, given the higher interest rates that future Eurobonds will be issued at, annual interest payments on $32bn will be approaching $3bn a year. When you factor in upcoming Eurobond maturities, and challenge oil export revenues, it is difficult to see the Eurobond market being supportive when we cross the $30bn level.
If Nigeria issues another Eurobond in May, would this be the last issue for the year?
Given the record high budget deficit, constrained oil exports and shortfall in foreign exchange earning accruing to external reserves, I don’t think the Federal Government can avoid another large Eurobond issue later this year. I would expect a large, multi-tenor transaction of $3-5 billion in September or October. Unfortunately, rates are likely to be higher by then suggesting that most of those issues will be priced at over 10 per cent.
What alternatives does the Federal Government of Nigeria have to Eurobond market?
There are not many alternatives to the Eurobond market for quick, USD for deficit funding with no conditions. Most DFI funding will require some kind of reforms to access billions of USDs. I don’t see the World Bank lending Nigeria billions of USD knowing that it could be used to fund petrol subsidies which they have said need to be scrapped.
It might be possible to get some commercial loans from large international banks but I suspect that the conditions for such borrowing might not be as flexible as with a Eurobond issuance.
The federal government has been funding increasingly larger amounts from the domestic bond market. However, there is a limit to how much can be raised from this market without driving up rates substantially and crowding out the private sector. Also, Naira borrowing does nothing to help the foreign reserves which are challenged due to limited benefit of $100 oil to the government.
So for now, I would expect the Nigerian government to keep raising large amounts from the Eurobond market till that market is no longer receptive to new Nigeria issues.
