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Testing the waters, why Nigeria’s eurobond was a huge success

By Omoh Gabriel, Business Editor
Nigeria issued a $500 million debut Eurobond on Friday with a 7.0 per cent yield in a deal that was heavily oversubscribed, as appetite for high-yielding assets outweighed concern about its depleted oil savings.

Since then, many have wondered why Nigeria should be taking the bond option while others question the rationale behind the Federal Government toeing that line of decision.

From the number of enquiries, it will appear that the average Nigerian does not know what eurobond means.  Before the debut of the bond penultimate Friday, there was so much fear as to whether it will succeed. The fear of failure in the international market place was probably why the amount offered was small and the delay in its offering. But at a time when returns on equity at the global stock market are low and the gyration in prices of stock is still on a bearish run, most institutional investors with lots of retirees’ funds try to avoid risky stock or go for bonds that are almost risk-free.

Usually, a eurobond is issued by an international syndicate and categorised according to the currency in which it is denominated. A euro-dollar bond that is denominated in U.S. dollars and issued in London by Nigeria is a eurobond. Nigeria could have issued the euro-dollar bond in any country other than the U.S. Eurobonds are attractive financing tools as they give issuers the flexibility to choose the country in which to offer their bond according to the country’s regulatory constraints.

They may also denominate their eurobond in their preferred currency. Eurobonds are attractive to investors as they have small par values and high liquidity.

The main reason for Nigeria Eurobond issue is to set a benchmark yield curve for Nigeria in the global market, rather than to raise funds, meaning the country has ample room to repay investors. Standard Bank analyst, Samir Gadio pointed out that Nigeria’s foreign reserves were 67 times the Eurobond size and that its external debt-to-GDP ratio was just 2.3 per cent. “Overall, the risk of default on the Eurobond is marginal,” he said in a research note.

This means that the primary purpose of Nigeria issuing the bond is not to raise money though in the 2009, 2010 budgets, it is stated as part of the source of financing the deficit.

As a demonstration of the confidence the international investors have on Nigeria despite the negative publicity and blurring image created of the country outside its shores, investors from 18 countries spanning Europe, the United States, Asia and Africa took up the offer, which was 2.5 times oversubscribed, Finance Minister, Olusegun Aganga said.

“This single transaction clearly puts Nigeria on the global map. We now have a transparent and internationally observable benchmark against which international investors can accurately price risk,” Aganga said, forecasting a rise in foreign investment into Nigeria’s economy.

The successful issue by Nigeria, months ahead of elections, could reassure others on the continent of the strength of demand for African debt, convincing them to press ahead with similar but delayed plans.

The 10-year bond was priced in line with Nigeria’s 7.0 per cent guidance and will pay a 6.75 per cent coupon, with settlement on Jan. 28 (last Friday).

The pricing means investors demanded a premium to West African peer, Ghana, whose 8.5 per cent Eurobond due 2017 is currently yielding around 6.2 per cent. While demand for high-yielding assets, the paucity of West African credit and the relatively low volume of the issue had been expected to fuel appetite, some potential investors were put off by the rapid depletion in Nigeria’s oil savings.
Prior to the issue, there were fears that the bond will not succeed.

Fitch, an international rating agency had assigned the issue a ‘BB-’ rating on Friday, saying low debt ratios and robust growth played in Nigeria’s favour, but also noting concern about a decline in reserves last year despite a rise in oil prices and production.

According to Fitch, “Reserves have risen around $1 billion since the end of 2010, but in the absence of fundamental institutional reforms on the usage of oil revenues and savings, this gradual build-up is unlikely to be sustained,”.

Also Standard & Poors had assigned a ‘B+’ long-term senior unsecured debt rating to the issue. One leading fund manager who participated in Eurobond issues by Ghana and fellow African oil producer, Gabon at the end of 2006 said he was steering clear of Nigeria’s offering given concerns over the huge outflows from oil savings. Nigeria’s excess crude account (ECA) into which it saves oil revenues above a benchmark price, has dwindled to less than $1 billion from $20 billion at the start of the current presidential term four years ago.

Foreign reserves, of which the Excess Crude Account  is a part, inched up month-by-month to $33.5 billion by mid-January but are still down more than a quarter on year-ago levels. Nigeria has shrugged off the concerns, saying the spending was needed to defend the naira currency against increased dollar demand, fund projects in the power sector, and provide seed funding for a planned sovereign wealth fund, which should form a firmer legal basis than the ECA for safeguarding oil savings.

Central Bank Governor, Sanusi Lamido Sanusi said: “We had to draw on forex (reserves) to meet elevated (dollar) demand levels as we couldn’t risk an accelerated exit from quantitative easing while banking reforms were still at initial stages. Now with monetary tightening, higher yields, a recovering equity market … and progress on banking resolution, a higher oil price and stable output, my sense is that the reserve attrition will stop,” he said.

Bonds which are loans given to governments in exchange for certificate of investment are quite different from shares. While shares are an entitlement to ownership of a company, bonds are loans or debt owed by the issuer to those who take them up.

This difference brings the first main advantage of bonds: In general, investing in debt is safer than investing in equity. The reason for this is the priority that debt holders have over shareholders. If a company goes bankrupt, debt holders are ahead of shareholders in the line to get paid. In a worst-case scenario such as bankruptcy, the creditors (debt holders) usually get at least some of their money back, while shareholders often lose their entire investment.

In terms of safety, bonds are considered “risk-free”. (There are no stocks that are considered as such.) If capital preservation – which is a fancy term for “never losing your principal investment” – is your primary goal, then a bond from a stable government is your best bet. Though bonds are safer as a general rule, that doesn’t mean they are all completely safe. There are also very risky bonds. These are known as junk bonds.

If history is any indication, stocks will outperform bonds in the long run. However, bonds outperform stocks at certain times in the economic cycle. It’s not unusual for stocks to lose 10 per cent or more in a year, so when bonds make up a portion of your portfolio, they can help smooth out the bumps when a recession comes around.

There are always conditions in which we need security and predictability. Retirees, for instance, often rely on the predictable income generated by bonds. If your portfolio consisted solely of stocks, it would be quite disappointing to retire two years into a bear market! By owning bonds, retirees are able to predict with a greater degree of certainty how much income they’ll have in their golden years. An investor who still has many years until retirement has plenty of time to make up for any losses from periods of decline in equities.

Sometimes bonds are just the only decent option. The interest rates on bonds are typically greater than the rates paid by banks on savings accounts. As a result, if you are saving and you don’t need the money in the short term, bonds will give you the greatest return without posing too much risk.
College savings are a good example of funds you want to increase through investment, while also protecting them from risk. Parking your money in the bank is a start, but it’s not going to give you any return. With bonds, aspiring college students (or their parents) can predict their investment earnings and determine the amount they’ll have to contribute to accumulate their tuition nest egg by the time college rolls around.

There really is no easy answer to how much of your portfolio should be invested in bonds. Quite often, you’ll hear an old rule that says investors should formulate their allocation by subtracting their age from 100. The resulting figure indicates the percentage of a person’s assets that should be invested in stocks, with the rest spread between bonds and cash. According to this rule, a 20-year-old should have 80% in stocks and 20% in cash and bonds, while someone who is 65 should have 35% of assets in stocks and 65% in bonds and cash.

That being said, guidelines are just guidelines, they can contribute an element of stability to almost any portfolio. Bonds are a safe and conservative investment. They provide a predictable stream of income when stocks perform poorly,

The Central Bank of Nigeria has said that the Federal Government’s $500 million Eurobond will set a benchmark for borrowing on the International Capital Market.


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