Nigeria Eurobonds rally in November as investors take advantage of higher yields

Nigeria’s 5-and 10-year Eurobond prices rallied in the month of November 2022 as investors moved to rebalance their portfolios ahead of the new year whilst taking advantage of higher yields.

The 5-year Eurobond dated November 2027 with a coupon of 6.5% closed the month of October priced at $71.39 with a yield of 14.45%. The 10-year Eurobond dated February 2032 with a coupon of 7.87% closed the month of October priced at $64.7 with a yield of 14.45%.

A unit price of Nigeria’s Eurobond is denominated at $100 thus the 5- and 10-year Eurobond were both down $28.8 and $35.5 respectively placing the bond in junk territory.  However, the recent rally in November suggests investors see value in the bonds.

Bonds rally in November: The 5-year Eurobond mentioned above rallied to $80 per $100 par price while the 10-year Eurobond rallied to $77.26 per $100 par price.

• Nigeria has a total Eurobond debt profile of about $15.6 billion as of June 2022 unchanged from the same period last December.
• Eurobonds also make up about 10% of Nigeria’s total debt profile which Nairametrics estimates at about $151.3 billion (inclusive of Ways and Means).
• Nigeria’s Eurobond appears to be rallying at a time when its sub-Saharan African neighbour, Ghana is struggling to service its debt amidst a currency crisis.
• The government also made provisions for debt servicing in its 2023 proposed annual budget but did not indicate any immediate plans to increase Eurobond holdings.

Why it is rallying: At 14.5% for a 5-year Eurobond, Nigeria’s foreign debt entered junk status suggesting investors were worried about the country’s ability to service it.

• It appears investors may be having a change of heart considering that the country had not indicated any challenges with repaying the debts.
• We also believe, investors are taking advantage of higher yields in the fixed-income market when compared to other investment outlets
• The CBN also alluded to this in its last monetary policy communique claiming that the bad performance of the All Share Index in October was also because “investors are taking advantage of higher yields in the fixed income market” when compared to other investment outlets
• The recent bond rally in November also aligns with the Nigerian Exchange All Share Index which gained 8.72% reversing the 10% loss recorded in October.

We also note that about $14.42 billion or 91% of Nigeria’s Eurobond exposure is not due for redemption until after 2026.

Why this matters: A rallying Eurobond suggests foreign investors may likely be finding the bond prices as of October attractive considering the yields were well above competing investments.

• The bonds are also denominated in dollars which makes them attractive for investors with a significant dollar position.
• It also suggests investors may have some confidence in Nigeria’s ability to repay its foreign currency-denominated loans which inclusive of multi-lateral and bilateral loans is about 26.4% of Nigeria’s public debt.
• An improving price for Nigeria’s Eurobond will be good news for the debt management office (DMO). The lower the price, the more expensive it is for Nigeria to borrow.
• One of the reasons why Nigeria avoided the foreign debt market was also cost.

Headwinds remain: While the bond market appears to be improving for Nigeria potential headwinds still exist especially in the forex market.

• Nigeria’s central bank governor, Godwin Emefiele recently stated that the apex bank’s external reserve received zero from oil proceeds.
• Nigeria’s external reserve fell to a one-year low of about $37.1 billion in November as the apex bank faced pressure to meet demand at the Investor & Exporter window.
• The government is also still facing a fiscal crisis as oil revenues continue to dip due to large-scale uncontained crude oil theft.
• There is still a cloud of uncertainty ahead of the 2023 elections.

Flashback: Just last month, rating agency, Fitch Ratings downgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’.

• Fitch also mentioned that a downgrade was also done due to the Cost of Debt Spiking.
• Moody’s on the other hand explained Nigeria’s fiscal challenges and dwindling external reserves contributed significantly to the decision to downgrade the country’s ratings from B2 to B3.

What to watch: As we approach the end of the year, Nairametrics expects the bond prices to rise albeit cautiously as investors continue to rebalance their portfolios.

• Nigeria also has a $500 million Eurobond due for redemption (payment) at the end of July next year.
• It will be one of the first responsibilities of the next government which takes over from the Buhari-led administration.