Egie Akpata is the chairman of Skymark Partners Limited, a company based in Lagos. 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 continue borrowing from the international capital market.
Isn’t it premature for Nigeria to talk about returning to the international capital market?
I don’t think it’s premature for Nigeria to return to the Eurobond market after issuing $1.25 billion in March. The sad reality is that the federal government runs a very large deficit that can hardly be financed by local markets alone. Additionally, Eurobond yields have risen, so the sooner Nigeria sells a new issue, the cheaper it would be to wait until later in the year. The finance minister reportedly mentioned a potential $950 million bond issue around May. The show would likely be successful, but would pay a significantly higher rate than the recent March show.
How well are Nigerian Eurobonds currently doing in the market to warrant another bond offering so soon?
The rationale for another issue is the need to finance the federal government’s deficit, not because of the secondary market performance of existing Nigerian Eurobonds.
Yields on Eurobonds issued by African countries have risen significantly over the past six months. This means that their prices have fallen while bond yields move inversely to prices. This is partly due to soaring US government bond yields, as the US Federal Reserve signaled to the market that it needed to raise interest rates significantly to curb record inflation levels. Nigerian Eurobonds tend to yield more than one percent less than Egyptian Eurobonds of similar duration and 4 to 11 percent less than Ghanaian Eurobonds of similar duration. So, compared to two of Africa’s largest Eurobond issuers, Nigeria still pays a lower rate.
How easy is it for individuals to invest in Nigerian Eurobonds? is it even recommended?
For most individuals, it is not advisable to invest directly in Nigerian Eurobonds. Most people would be better served by investing in 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, cut-off mutual funds are more affordable for most people. In addition, Eurobond prices have fallen significantly over the past six months. Investors in a dollar mutual fund with Eurobonds and other dollar assets are unlikely to have performed as badly as a direct investment in Nigerian Eurobonds due to poor management more active in the portfolio.
To be more specific, the Nigerian Eurobond 2029 issued in March at a yield of 8.375% saw its price drop from 100 to 94 leaving investors; with a capital loss of 6% in just one month. The Nigerian Eurobond 2051 issued in September 2021 at an 8.25% coupon saw its price drop from 100 to 76, leaving investors with a capital loss of 24% in just 7 months. These are very large losses that can only be minimized by active trading and portfolio management that is difficult to achieve as a passive amateur investor.
How do Nigeria’s economic fundamentals measure up against other African Eurobond issuing peers?
Due to the size of the Nigerian economy and oil exports, the country is considered good credit by Eurobond investors. Nigeria’s GDP growth rate has been competitive with other major Eurobond issuers like Ghana, Egypt or Angola. Relative to Nigeria’s GDP, our Eurobond outstanding of $16.1 billion is not as heavy as Ghana’s $13 billion outstanding with a GDP that is 20% of Nigeria’s.
What premium will we likely need to add to our existing ratings to make our offers attractive enough?
New Eurobond issues are always priced higher than existing similar issues on the secondary market. This “new issue premium” of 0.25 to 0.50% is necessary to encourage investors to bid for this new instrument. The amount of the premium varies according to market conditions at the time of issue, and the size and duration of the new bond.
Can Nigeria really afford to manage $16 billion in outstanding Eurobonds?
The short-term cost of servicing Eurobonds is the annual coupon. Current annual coupon payments on Nigeria Eurobonds amount to $1.2 billion per year. That’s $100 million a month, which, based on oil exports, is affordable for Nigeria. The challenge is how the bonds are repaid at maturity. Practically, new bonds will be issued to repay maturing Eurobonds. For now, deadlines are not a big issue for Nigeria. $300 million matures in June this year and $500 million in July 2023. There is no maturity in 2024 or 2026. But from 2027 to 2033 the maturities are around 1.5 billion dollars a year that will have to be repaid or refinanced with new issues of Eurobonds. .
How long can Nigeria continue to fund itself in the Eurobond market before it runs out of investors willing to buy our Eurobonds?
If Nigeria continues to issue around $4 billion a year in Eurobonds, the outstanding amount of Nigerian government Eurobonds would double to $32 billion in four years. This would be even less than the $35.6 billion of Egyptian Eurobonds outstanding.
However, given the higher interest rates at which future Eurobonds will be issued, annual interest payments on $32 billion will approach $3 billion per year. When you factor in upcoming Eurobond maturities and challenge oil export earnings, it’s hard to see the Eurobond market being supportive when we cross the $30 billion mark.
If Nigeria issued another Eurobond in May, would it be the last issue of the year?
Given the record budget deficit, limited oil exports and lack of foreign exchange earnings from external reserves, I don’t think the federal government can avoid another large Eurobond issue later this year. I would expect a large multi-maturity transaction of $3-5 billion in September or October. Unfortunately, rates will likely be higher by then, suggesting that most of these shows will be priced over 10%.
What alternatives does the Federal Government of Nigeria have in the Eurobond market?
There are not many alternatives to the Eurobond market for quick USD deficit financing without strings attached. Most DFI financing will require some sort of reform to access billions of dollars. I don’t see the World Bank lending Nigeria billions of dollars knowing that they could be used to fund gasoline subsidies which they say need to be removed.
It might be possible to obtain commercial loans from major international banks, but I suspect that the terms of such loans might not be as flexible as with a Eurobond issue.
The federal government financed increasingly large amounts from the domestic bond market. However, there is a limit to the amount that can be raised in this market without driving up rates substantially and crowding out the private sector. Moreover, the borrowing of Naira does nothing to help the foreign exchange reserves which are disputed due to the limited profit of $100 oil for the government.
So, for now, I would expect the Nigerian government to continue raising significant sums in the Eurobond market until that market is no longer receptive to new Nigerian issues.