Investor demand for FBN Holdings shares rose significantly on Friday, April 30, 2021, a day after the central bank fired the board members of the company and the bank.
About 74 million shares of the stock has been traded today making it the stock with the highest volume of trade and value during the day.
With an hour to go, the bank had a bid depth of about 73.5 million and an offer depth of 34.5 million indicative of a net bid and suggesting that there were more investors interested in buying the bank’s shares than wanting to sell. Bids refer to a request to buy a stock while offer represents a request to sell a stock.
FBN Holdings stock closed lower by about 6% on Thursday as investors reacted negatively to CBN’s query to the bank to reverse the removal of Dr Sola Adeduntan as MD/CEO. However, on Thursday the CBN Governor, Godwin Emefiele held a press conference where he reinstated Adeduntan as MD/CEO and fired the board of both the bank and its parent company.
In perhaps a positive sign that investors agree with the removal of Oba Otudeko as Chairman of the bank, the share price has held steady on Friday with more bids than offers. About 74 million units of the bank’s shares had exchanged hands with the share price falling by just 2.9% with an hour left to closing bells.
At N6.7, FBN Holdings’ share price is one of the cheapest in the banking sector trading at a price to earnings ratio of just 3.3x. The market capitalization of the stock is also 31% of its Net Asset, another metrics that suggests it could be undervalued.
A trader who spoke to Nairametrics indicated that there has been a high demand for FBN Holdings shares even before the current controversies surrounding the removal and reinstatement of the MD/CEO. Some investors might also be telling themselves “it can only be better going forward” opining that investors typically see opportunities to make money from chaos as is the case today.
As at when this article was written, FBN Holdings had about 75 million shares in demand that is yet to be met.
How to invest in Nigerian Eurobonds
Before investing in Eurobonds, weigh the bond’s risk characteristics and set them against the interest rate to know if it is worth it.
As of 2019, Nigeria’s Eurobonds were regarded as one of the top 5 best-performing Eurobonds in the world.
Although Nigeria’s Eurobonds remain one of the most profitable in the investment world, not many individuals know how to invest in them. The Federal Government and a number of corporate organisations in the country subscribe to Eurobonds and issue them quite often, lending credence to their attractiveness as an investment tool.
What is Eurobond?
Basically, Eurobonds are financial instruments issued by a country or corporate organisation in a currency different from the currency of the issuer.
Nigeria typically issues Eurobond instruments denominated in US dollars. For example, the 6.75% $500 million January 2021 Eurobond was denominated in US dollars.
There is the sovereign, which is referred to as a government bond, and the corporate bond. Eurobonds operate like fixed income securities in terms of bond instruments. It has a coupon, an interest rate paid on bonds (which is paid bi-annually), a price at which the bond will be purchased, and also a yield.
The price and yield have an inverse relationship meaning that when the price goes up, the yield comes down. When the yield is coming down, the instrument is trading at a premium compared to when it was issued.
An investor can buy Eurobonds while the primary auction is ongoing or later, at the secondary market, for those who were unable to participate in the primary auction.
How to invest in Nigerian Eurobonds
The process of investing in Eurobonds in Nigeria is not any different from that of investing in local bonds. Both bonds can be bought from either the primary market at the initial offer level or at the secondary market for existing bonds.
All that is required is for the investor to complete the tender for the Federal Government of Nigeria or corporate bonds form, submit the tender through any of the authorized dealers and make the required payment when the bid is successful.
Basically, for banks, your account has to be funded with the desired currency. For instance, to buy a dollar-denominated Eurobond which is the conventional one issued in Nigeria, you have to fund your account with dollars, then send an instruction for the bond purchase.
Be mindful of the bond’s risk profile before investing
Eurobonds can either be corporate or government bonds. Corporate bonds may offer higher interest rates than government-issued Eurobonds but they also come with higher risk.
If you want to invest in Eurobonds, ensure that you weigh the risk characteristics of the bonds and set them against the interest rate to know if it is worth it. Most Eurobonds come with credit ratings, which serve as a measure of their quality and risk profile.
Usually, bonds with the highest quality credit ratings come with the lowest yields while bonds with lower credit ratings offer higher yields. The yield, in this sense, is a measure of the bond issuer’s creditworthiness meaning that the greater the credit risk on an investment, the higher the yield investors would demand to compensate for it.
How to obtain an FG Eurobond
When bonds are issued at the primary market, the issuance document contains a list of the banks or brokers that have been authorized to sell the bonds. The FGN issued bonds are purchased through the Primary Dealer Market Makers (PDMMs). These are banks appointed by the Debt Management Office (DMO), to act as authorized dealers of FGN bonds.
Can you fund a Eurobond with a naira account?
Not at the moment! You need a dollar account (domiciliary account) that is funded but your bank can easily guide you on how to obtain one.
Next is to fill out instruction documents after which the bank will send you a market price and the expected yield. The bank then debits your account for the purchase. Every six months or on the specified coupon dates, you will receive your coupon and at maturity, you will get your principal back if the issuer does not default. A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from the issue date until maturity.
Here is a simplified example of the process:
You walk into a branch of your bank and ask to purchase $100,000 worth of Eurobonds. Note that your domiciliary account should already be funded with the amount. You would be required to fill out and sign the letter of instruction which would then be sent to the bank’s treasury unit for processing. The treasury unit responds with the available Eurobond prices and requests you to confirm the purchase. When that is done, the treasury unit executes the deal and holds it in their custody.
You can also sell the bonds at the secondary market.
Minimum investment as an individual
The minimum conventional investment tranche is $200,000, but a $100,000 worth of investment is also permissible. Amounts lower than this are however problematic because the secondary market trades in tranches of $200,000.
Can people invest through mutual funds?
Basically, what mutual funds do is amass investors’ funds and buy Eurobonds in the secondary market. A mutual fund is just like a vehicle that helps you to buy bonds so that you are not faced with the issuer’s risk directly. Therefore, individuals or institutions can also buy Eurobonds through mutual funds.
Mutual funds make it possible for you to participate in bond-buying with less than the statutory amount since they operate by pooling resources together from a large number of investors.
Ratings agency, Moody’s reveals it is reviewing First Bank’s ratings
Moody’s explained why it might downgrade First Bank’s ratings.
Moody’s Ratings agency said on Thursday that it has put First Bank of Nigeria on review for a downgrade after the central bank sacked the board of directors and replaced them with new directors.
Moody’s made this statement in a report titled ‘Removal of Non-Executive Board Members Highlights Governance Shortcomings.’
In a quote, Moody’s said:
“Moody’s Investors Service, (“Moody’s”) has today placed all long-term ratings and assessments of First Bank of Nigeria Limited (First Bank) on review for downgrade. The review will focus primarily on an assessment of evolving governance considerations at First Bank, specifically corporate governance developments. The rating action follows the dissolution of First Bank’s board by the Central Bank of Nigeria (CBN), the bank’s primary regulator, on 29 April 2021. As a result of this action by the CBN, all the non-executive directors were removed while the executive management remained in place.”
The Governor of the Central Bank of Nigeria, Godwin Emefiele, had last week announced the sack of the entire board of directors of FBN Holdings Plc and its subsidiary, First Bank of Nigeria Ltd following the initial removal of its MD/CEO Dr Sola Adeduntan. Following his sacking of the board, he set up a new board for the bank holding company and its subsidiary and also reinstated Adeduntan as MD/CEO.
Moody’s mentioned that the regulatory actions demanded of First Bank by the CBN introduces a clould of uncertainty over the outlook of the bank. For example, the CBN had asked the bank to divest from its holdings in two listed companies while also recovering its loans from one of them.
“The review for possible downgrade reflects the rating agency’s view that the removal of all non-executive directors of the bank’s board by the regulator demonstrates corporate governance shortcomings and weaknesses in board oversight. The bank also needs to implement regulatory directives concerning the resolutions of loans to, and shareholding in non-banking related parties, which reportedly had not been executed in the recent past.
Moody’s notes that the outcomes of these developments are uncertain at this point, and the final and long-term governance, reputational and financial implications of the events for First Bank are also unclear.”
The central bank directive sacking the board of the bank also retained its executive management perhaps suggesting that the CBN had confidence in the ability of the MD and his team to manage the bank. Moody’s also noted this in its briefing.
“While the bank’s executive management team remained the same, the rating agency believes these developments could distract management’s focus on implementing the bank’s strategic plan and road to recovery. First Bank management’s immediate key target was to reduce nonperforming loans (NPLs) to levels comparable with domestic peers. The rating agency recognises that, in the context of asset risks, the bank took steps to reduce its stock of problem loans, with its reported NPL ratio falling to 7.7% at year-end 2020 from 25.9% in 2018.”
Will Moody’s downgrade First Bank?
The rating agency explained that the decision to downgrade will depend on how strong the bank’s corporate governance structure is and whether the CBN will impose additional sanctions. If any of these crystallizes, it could downgrade its ratings.
“The bank’s long-term deposit ratings can be downgraded if flaws in the bank’s governance systems exist, and if the CBN imposes additional sanctions on the bank, including, but not limited to, conditions to address any vulnerabilities that may be discovered. Financial output that is less than anticipated could also result in a rating downgrade.”
Moody’s, however, poured water on any optimism around a rating upgrade.
Given the review for downgrade and the pessimistic outlook on the government of Nigeria, there is a slim chance that First Bank’s ratings will be upgraded. Stronger solvency progress than currently reflected in the ratings, combined with a stabilization of the sovereign outlook, could result in the outlook being stabilized.
Why is rating important?
Corporate Organizations desire positive ratings because of the effect it has on their ability to raise capital as well as the cost of capital. A high credit rating typically attracts positive investor sentiments helping organizations tap the debt and equity markets, especially from institutional investors.
Nairametrics | Company Earnings
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