Nairametrics| The $1 billion Eurobond subscription issued by the Federal Government (FG) has been the subject of much attention in recent days by economic analysts and politicians alike with mixed reviews coming in. For some, the 780% over-subscription of the bond is a testament to the fact that the economic world still has strong appetite for Nigeria, while for others the 7.875% interest rate is a sore point as the repayment of the bond could impact economic activities.
Global ratings agency, Fitch, however, yesterday released its final ratings on the 15-year unsecured notes and labelled it a ‘B+’. According to a statement from the agency, Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘B+’, which has a Negative Outlook played a key role in determining the final ratings for the bond.
What though does a B+ rating mean? Credit ratings are a measure of the amount of risk creditors are taking by buying into a particular debt.
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Simply put, they determine how likely a potential debtor is to repay the potential creditor at the specified time of repayment. Investors usually depend on these ratings to determine whether or not to invest in a particular debt issuance. The lower the ratings, however, the higher the interest rate involved in an attempt to draw in investors.
The ratings cover credit of all kinds such as securities, debt and other obligations of all sizes of public finance entities, from government finance institutions to corporate institutions. These ratings are usually released by 3 agencies, Standards & Poor, Moody’s and Fitch.
For Fitch’s credit ratings, they rank from AAA to D, with the +/- modifier for each group. The AAA represents the surest kind of credit with creditors certain to get paid while D- has the worst rating with the debtor noticeably failing on previous obligations and expected to continue failing on any future obligation.
Nigeria’s B+ rating indicates that the financial situation in the country still varies noticeably, although not severely enough to generally undermine the likelihood of its repaying the debt as at when due. This was ably reflected in the 7.875% interest rate the FG has to pay on the bond. In some other countries such as the UK and Germany, similar bonds have been issued at negative interest rates, meaning that investors are paying the government in those countries for the opportunity to invest in them. Last year in July, for example, Germany sold €4.04bn worth of 10 year bonds at an interest rate of minus 0.05%. Given this, the 7.875% suddenly seems very high and may give a glimpse into why the bond was so highly subscribed to. Given the fact that Nigeria is not likely to default on the bond, but with ratings not positive enough, investors slapped a much higher interest rate on the Eurobond.
These ratings can have other effects on the Nigerian economy as well. For instance, foreign investors interested in coming into Nigeria may look at these ratings as a measure of the current start of the economy. A B+ is not likely to offer them the highest level of confidence and may deter foreign direct investment from coming into the country. So, while the Eurobond was a success in theory, Fitch’s ratings show that more needs to be done if Nigeria is to actually become an economic giant.[/read]