Dem Say We Do Eurobond; Guy, wetin be Eurobond? by @DoubleEph

Nairametrics| One way to think about it is that a country goes to the international market to ask the market some questions. The market then answers and that question and answer is reflected in the final outcome of the Eurobond.

In this case, Nigeria went to the market and asked the following questions 1) given all my current challenges with low oil prices, corruption, forex scarcity and distorted market, will you lend me $1bn and I will pay you back over 15 years? And 2) if you will lend me the money, what interest rates will you charge me?

For the first question, the market answered ‘Yes, we can lend you $1bn. Even though you’re in a tough economic position we still think that you can pay it back over 15 years’. And for the second question, the market said ‘We will charge you 7.875% to lend you $1bn over 15 years’

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This is the summary of what happened yesterday.

Before yesterday though, Nigeria’s finance minister and a few other people went to London, Los Angeles, Boston and New York to meet investors and present its case. Yesterday was the conclusion of the deal.

But I hear say na $7.8bn investors give us o! Hope no be say these people go declare $1bn for Nigeria come chop the rest?

Yes, investors placed orders for $7.8bn. But Nigeria was only selling $1bn worth of debt. This means that quite a number of investors were attracted to the offer. When it happens like that, the country usually sells to investors on pro-rata basis. To put it simply, if there were only 7 bidders who bid that $7.8bn total, this means that each of them will end up getting only 13% of what they wanted. The idea is to try as much as possible to satisfy everyone in one way or the other instead of doing first-come, first-serve. It helps to have a wide range of investors ‘against next time’.

This is not new. In 2011 when Nigeria did its first Eurobond, it borrowed $500m for 10 years at 7% and got $1.25bn worth of bids. When it did the second one in 2013, it borrowed $1bn ($500m for 5 years at 5.375% and $500m for 10 years at 6.625%) and got $4bn worth of bids.

Part of the reason is that Nigeria always borrows very small amounts money so bids will always be high since the interest rate is good (by international standards).

This Eurobond also increases Nigeria’s yield ‘profile’ in the market. From the above, you can see that Nigeria now has a market price for 5, 10 and 15 year debts. That is to say, we have tested the markets and we now know that we can borrow for up to 15 years. The next step is to find out if they will borrow us money for 30 years and for how much. A few weeks ago, Egypt went to the market and was able to borrow money for 30 years at 8.5%. If Egypt can do it, Nigeria definitely can. After all, both economies are in a similar type of mess.

But we need pass $1bn for Nigeria na. If dem wan give us $7.8bn, why we no take am? You sure say these people never collect the balance for their Swiss account?

That is a good question. A lot of countries always put flexibility when they are selling bonds. So a country can say that if we receive bids more than 4x what we want to borrow, we will take an extra 20% of the amount.

A good example of this is Saudi Arabia which went to the market in October 2016 to borrow $15bn. They ended up receiving bids worth $67bn so they took an extra $2.5bn to bring the total to $17.5bn.

Unfortunately, Nigeria’s finance ministry only asked for $1bn from the National Assembly and did not build in any flexibility into the request. So the NASS only approved borrowing of $1bn – that is, even if Nigeria received bids worth $1 trillion, it was only legally allowed to take $1bn. If Nigeria wants to borrow more money, it will have to go back to the NASS for another request.

There is a small downside to this. The more bids you get, the lower interest you will pay since. When bids started coming in yesterday, the market was first asking for 8.18%. As more bids poured in, the rate fell till it closed at 7.875%.

Hmmm… I no too dey trust Oyinbo. Dem way no pure. Why dem dey borrow Nigeria money? No be dem talk say we be thief and we no sabi anything? Dem no dey fear say we go carry their money run?

A wise man somewhere said Pecunia non olet (money does not smell). These investors are the same ones who lend money to rich countries like America, Germany and UK. Last year in July, Germany sold €4.04bn worth of 10 year bonds at an interest rate of minus 0.05%.

Chineke!

Yes, if you bought that bond, you were effectively paying Germany for the privilege of lending money to it. Other countries like Japan and Switzerland also sold bonds last year with negative interest. In fact, at one point, every type of Swiss government bond up to 50 years was negative in the second-hand market last year. Same with the UK for some 10 year bonds.

What this means is that investors are hungry for good rates. Rich countries are very safe and everybody wants to lend them money. This drives down the rates they pay very very low and even below zero.

The only place to get good rates now is in ‘emerging markets’ like Nigeria, Argentina, Saudi Arabia, Egypt etc. But it is risky. In 2001, Argentina defaulted on nearly $100bn it owed. A new government might come in and refuse to pay what the old government borrowed (claiming it was stolen). Mozambique is currently going through this mess with its lenders. This is partly why they charge higher rates to compensate for the risk.

However it can be very painful for a country if it just thinks it can stop paying. It took 15 years for Argentina to be able to borrow again and in that time its creditors were chasing it around the world – they even seized one of its ships in Ghana. If Nigeria tries to default, creditors can seize its embassy building in New York or even seize the Nigerian President when he travels abroad (ok, they can’t do that actually). It’s not worth the stress. Borrow what you can afford to pay and do your best to pay. To avoid stories that touch.

So wetin come be the memory verse from this Eurobond? Dollar go come down?

$1bn is too tiny to make a difference in Nigeria’s forex crisis. Yes, the money will go to CBN who will then give the government the naira equivalent. This means that CBN will have a bit more dollars to sell to people who want to import approved stuff. Government also has more money to spend on its numerous problems.

But the bigger benefit is that it further plugs Nigeria into what Goodluck Jonathan famously and eloquently called ‘the global world’. We now know how risky we are in the eyes of investors (at least to an extent). It makes Nigeria a more ‘normal’ country. When investors are comparing different countries, they can easily find data on Nigeria and make their decision accordingly.

Personally, I think Nigeria should have borrowed more but the people in government know what the finances look like better than me. The interest on this bond will have to be paid back in dollars – these guys won’t collect naira. This means that a portion of whatever Nigeria makes from oil over the next 15 years will have to be set aside to repay this bond (and the previous ones). The more you borrow, the more you have to set aside. This is why you should only borrow this kind of money to invest in things like infrastructure that can unlock your economy and increase revenues. Anything else will make you an unfortunate person.

So guy, talk true, wetin government wan talk this money do? You sure say dem no go take am pay salary or share am to governors make those ones take am pay salaries?

Well, you see….actually…when you think about it…what actually happened is that…

This interview was conducted over the telephone. Unfortunately, credit finished while I was trying to answer the last question.

Article was contributed by Feyi Fawehinmi. Follow Fey via his twitter handle @DoubleEph