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Debt Securities

Eurobonds in Nigeria: What they are and how to invest in them

Eurobonds in Nigeria: What they are and how to invest in them

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currency devaluation, Eurobond, parallel market, bond market

Going by the over subscriptions that followed each of the eurobonds issued in Nigeria by both the Federal Government and corporate organisations, one may not be wrong to say that eurobonds seem to have become a household name and a darling of bond investors in Nigeria and those that want to take advantage of the relatively high yield environment in Nigeria.

Even those who are not yet participating in the eurobonds in Nigeria are wondering what they are and how they can join the band wagon of eurobond investors. It is the above that forms the premise of this article.

Simply put, eurobonds are bonds that are denominated in a currency other than that of the issuer.

In the case of FGN 6.75% US$500 million January 2021 eurobond, for example, it is a bond issued by the Federal Government of Nigeria in Nigeria but denominated in US Dollars. Those who buy it, buy in Dollars and the interest and principal repayment are conducted in US Dollars.

As can be noted from the above example, eurobonds are not necessarily denominated in Euros as the name implies. Actually, bonds denominated in US Dollars are better known as Eurodollar bonds, while those denominated in Japanese Yen are called euroyen bonds, but eurobonds have come to be generally associated with bonds denominated in currencies other than that of the issuer.

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[Read Also: How Diaspora Bonds Work and Benefits]

Are eurobonds foreign bonds?

To avoid confusion, there may be need to differentiate between eurobonds and foreign bonds in that eurobonds differ from foreign bonds. A foreign bond is a bond issued by a foreign borrower in another country’s domestic bond market and denominated in the issuer’s country’s currency. Examples of foreign bonds are what have been known by their nick names in the international bond market as, Yankee bonds which are foreign bonds issued in the US; Samurai bonds which are foreign bonds issued in Japan; Bulldog bonds,  foreign bonds issued in London while Rembrandt bonds are foreign bonds issued in the Netherlands.

The question then is, if eurobonds differ from foreign bonds, why not issue foreign bonds rather than eurobonds?

The major reason why governments and corporates choose to issue eurobonds rather than foreign bonds is that eurobonds do not face as much regulatory requirements as foreign bonds. For example, foreign bonds require that they be underwritten by domestic financial syndicates in keeping with local regulations but most eurobonds don’t. So, this regulatory flexibility makes it easier and enticing to issue eurobonds instead.

How to Invest In eurobonds

The process of investing in eurobonds in Nigeria does not differ from that of ordinary bond. Basically, FGN bonds and indeed, FGN eurobonds can be bought at the primary market at the initial offer level or at the secondary market for an existing bond. The process entails completing the Tender for Federal Government of Nigeria Bonds’ form, submitting same through any of the authorised dealers and making the required payment when bid is successful.


Before you buy

Like every other investment, buying eurobonds should be a well thought out process and not just a means to join the jones or jump into the band wagon of eurobond investors. It is advisable to review and understand the risk profile of any eurobond that you are interested in buying.

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[Read Also:Difference Between Coupon And Yield]


Government or Corporate eurobonds?

Given that eurobonds come as government and corporates, as a prospective investor, you have to decide whether to buy FGN eurobonds (government) or Seplat eurobond (corporate). Corporate issued eurobonds may offer higher interest than government issued ones, but they also offer higher risk.


Invest According to Your Risk Appetite

Given that different bonds, in this case eurobonds, have different risks characteristics, just like different investors have different risk appetite and tolerance, a prospective buyer of eurobond should weigh the risk characteristics of the eurobonds in relation to the amount of risk he or she is willing to stomach. Most eurobonds come with credit ratings, which act as a measure of their quality and risk profile. An AA rated bond is of higher quality than A rated bond. An AA rated bond, in all intents and purposes, offers more security and stability and , therefore, pays lower interest than an A rated bond. So, pay attention to the credit rating of the issuer and the bond itself as well as the credibility of the rating agency giving the rating.

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Having done your homework as noted above, it is time to select which eurobond to buy, if more than one is on offer, and then, the next step is to select which broker to buy it through.

Usually, when bond issues open as primary issues, the relevant document contains a list of the banks or brokers that have been contracted to sell the bonds. In Nigeria, FGN issued bonds are purchased via Primary Dealer Market Makers (PDMMs). They are banks appointed by the Debt Management Office of Nigeria, (DMO), to act as authorised dealers in FGN bonds. Each of them have their operational strengths and weakness like their turn around time, their responsiveness to clients, their client service excellence and so on.

[Read Also: Foreign companies are threatening to leave Nigeria]

The banks/brokers may differ in their commissions and other charges as well; so, pay attention to that as you evaluate which one to put your deal through. Doing some research on some of the brokers/banks, if you have not dealt with them before, will be helpful in selecting which one to use for your bond trade.

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Having selected the broker/bank, it is time to complete the required purchase order forms and instructions on what account to debit for the purchase.

The last process then is waiting and getting a confirmation from your bank/broker that your purchase has been successful.

Advantages of eurobonds

Eurobonds present advantages to both the issuers and investors alike. By issuing eurobonds, government and corporate issuers get access to international markets that would not ordinarily have been accessible.

It also helps corporate issuers especially, to manage their balance sheet in that it allows them to obtain funds in foreign currency which helps them create foreign currency denominated liability that could be used to match their foreign currency denominated assets.

[Read Also: Ecobank raises $450 million through bond offering]

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Eurobonds present investors with the benefit or possibility of achieving a higher yield on investments, although with yield in Nigeria being so high in relation to other countries, this advantage stands to be proven.

There are disadvantages that go with eurobonds, the major of which is foreign exchange risk.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

2 Comments

2 Comments

  1. Jeffrey Uzoka

    September 22, 2019 at 10:07 pm

    How foreign exchange a risk?

    Considering the fact our current inflation rate is a little over 11%, it seems better to invest in a foreign currency like dollars rather than naira.

  2. Seun

    February 4, 2020 at 8:14 am

    Thank you, sir for this insightful article.
    Are bonds (any and every type) taxable?

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Debt Securities

DMO offers N150 billion worth of FGN Bonds for subscription

FGN Bonds are backed by the full faith and credit of the Federal Government of Nigeria.

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Debt Management Office resumes FGN savings bond offer on August 10, Eurobonds, Patience Oniha, DMO, External debt servicing

The Federal Government on Tuesday, 11th August 2020, through the Debt Management Office (DMO), offered for subscription Federal Government Bonds (FGN Bonds) valued at N150 billion.

The FGN bonds are listed in four tranches that include:

  • N25,000,000,000 – 12.50% FGN JAN 2026 (10-Yr Re-opening)
  • N40,000,000,000 – 12.50% FGN MAR 2035 (15-Yr Re-opening)
  • N45,000,000,000 – 9.80% FGN JUL 2045 (25-Yr Re-opening)
  • N40,000,000,000 – 12.98% FGN MAR 2050 (30-Yr Re-opening)*

READ: UBA reports a 13.3% profit increase in audited FY 2019 financial statement

Auction Date: August 19, 2020

Settlement Date: August 21, 2020

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Summary Of The Offer

Issuer: Federal Government of Nigeria (“FGN”)

Units Of Sale: N1,000 per unit subject to a minimum subscription of N10,000 and in multiples of N1,000 thereafter.

Interest rate: For Re-openings of previously issued bonds, (where the coupon is already set), successful bidders will pay a price corresponding to the yield-to-maturity bid that clears the volume being auctioned, plus accrued interest from the original issue date.

READ ALSO: Nigeria’s Eurobond yield hit 12.8% as investors flee emerging markets

Interest payment: Payable semi-annually.

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Redemption: Bullet repayment on the maturity date.

Status:

  1. Qualifies as securities in which trustees can invest under the Trustee Investment Act
  2. Qualifies as Government securities within the meaning of Company Income Tax Act (“CITA”) and Personal Income Tax Act (“PITA”) for Tax Exemption for Pension Funds amongst other investors
  3. Listed on the Nigerian Stock Exchange
  4. All FGN Bonds qualify as liquid assets for liquidity ratio calculation for banks

Security: FGN Bonds are backed by the full faith and credit of the Federal Government of Nigeria and are charged upon the general assets of Nigeria

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Understanding Bonds: A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).

A bond could be thought of as an I.O.U. between the lender and the borrower that includes the details of the loan and its payments.

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A bond has an end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments that will be made by the borrower.

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Debt Securities

DMO announces August 2020 FGN Savings Bond offer for subscription

The FGN Savings Bond is backed by the full faith of the Federal Government of Nigeria.

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Debt management office, DMO,Nigeria's Debt to revenue ratio, DMO suspends April 2020 FGN savings bond offer

The Debt Management Office (DMO), on behalf of the Federal Government of Nigeria, recently offered for Subscription the August 2020 Federal Government of Nigeria Savings Bond.

The Federal Government of Nigeria Savings Bond is an investment product issued through the Debt Management Office (DMO) on behalf of the Federal Government.

The FGN Savings Bond is backed by the full faith of the Federal Government of Nigeria. As such, it is deemed to hold no default risk (Zero-Based Risk).

READ MORE: FG makes U-turn on Eurobonds, says it will issue some more

This is, therefore, to inform you that the Federal Government of Nigeria Savings Bond offer(s) for the month of August – 2020 has commenced on the 10th of August, 2020. It will close on the 14th of August, 2020.

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It consists of two (2) tenors:

2-Year FGN Savings Bond due August 12, 2022: 3.61% per annum

3-Year FGN Savings Bond due August 12, 2023: 4.61% per annum

Please find below additional information to guide your application:

Unit of Sale: N1,000 per unit subject to a minimum subscription of N5,000.00 and in multiples of N1,000.00 thereafter, subject to a maximum subscription of N50,000,000.00.

READ ALSO: Nigeria needs $100 billion annually to fix infrastructural deficit – Finance Minister 

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Coupon Payment: Payable every quarter with principal repayment at maturity.

Settlement Date: August 19, 2020.

Coupon Payment Date: November 19, February 19, May 19, August 19

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Security: The Federal Government of Nigeria Savings Bond is backed by the full faith and credit of the Federal Government of Nigeria (FGN).

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Debt Securities

Debt Management Office resumes FGN savings bond offer on August 10

The DMO assured that the Bond offers were going to resume when the conditions change.

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Debt Management Office resumes FGN savings bond offer on August 10, Eurobonds, Patience Oniha, DMO, External debt servicing

The Debt Management Office (DMO) has announced the resumption of its Federal Government of Nigeria (FGN) Savings Bond Offer with effect from August 10, 2020.

This disclosure was made in a press statement by the Debt Management Office to the general public.

The DMO was earlier forced to suspend the monthly offers of the FGN Savings Bond in April 2020, due to the lockdown and restrictions placed on social and economic activities as part of measures implemented by government to contain the spread of the Coronavirus pandemic.

READ ALSO: FG responsible for 80% of Nigeria’s N25.7 trillion debt profile 

The statement from the Debt Management Office said:

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“The DMO wishes to announce the resumption of its offer of the federal government of Nigeria savings bond (FGN savings bond) effective August 2020.

“The DMO was constrained to suspend the monthly offers of the FGN savings bond in April 2020 due to the restrictions on activities and movement as part of measures adopted by the government to curtail the spread of COVID-19.

“The offer for subscription will open on Monday, August 10, 2020 and close on Friday, August 14, 2020.’’

READ ALSO: State Governors parted with N33.9 billion to external debt deductions

The statement also encouraged investors to continue to save through the FGN Savings Bond. This is because FGN Savings Bonds attract good returns and are secure, being a Sovereign instrument. They also contribute to national development.

Nairametrics had on April 4, 2020, reported the suspension of the FGN Savings Bond offer by DMO which was scheduled for April 6 –April 10., due to the restrictions caused by the coronavirus pandemic.

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The DMO assured that the Bond offers were going to resume when the conditions change.

The DMO, however, noted that the suspension of the April 2020 Offer would not affect Coupon Payments due to investors for already issued FGN Securities, as arrangements had been made to ensure that all Coupon Payments for and redemptions of FGN Securities were made as and when due to investors’ designated accounts.

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