January 31, 2023

FG bonds tumble following Moody’s rating downgrade

Nigeria raises $1.25b Eurobonds

By Yinka Kolawole, with agency report

The Federal Government bonds recorded a significant fall yesterday with the nation’s sovereign-risk premium jumping highest in three months following the downgrading of Nigeria’s ratings by Moody’s Investors Service.

Recall that Moody’s downgraded the country on Friday to Caa1 from B3, noting the government’s fiscal and debt position was expected to keep deteriorating.

Longer-dated bonds were down the most, with the dollar-denominated 2051 Eurobond falling more than 2.8 cents in the dollar to 68.758 cents according to Tradeweb data. Only the Eurobond maturing this year fell less than one cent.

The extra yield investors demand to own the country’s dollar debt rather than Treasuries widened 49 basis points to 780, according to JPMorgan Chase & Co. data.

The rate on the nation’s 2032 bonds jumped 56 basis points to 12%, also the most since October. Forward contracts on the currency traded 28% weaker than the official rate on the one-year tenor.

JPMorgan noted that Nigeria’s bonds had outperformed other African and emerging market issuers over the last six months before the Moody’s downgrade.

“The review for downgrade focused on Nigeria’s fiscal and external position and the capacity of the government to address the ongoing deterioration – other than by alleviating the burden of its debt through any form of default, including debt exchanges or buy-backs,” Moody’s said.

“Immediate default risk is low, assuming no sudden, unexpected events such as another shock or shift in policy direction,” Moody’s added.

Moody’s said it expects just the interest payments on Nigeria’s debt to take up about half of the government’s revenue in the medium term, up from 35% in 2022. It also sees the debt-to-GDP ratio rising to 45%, up from 34% last year and 19% in 2019.

The International Monetary Fund, IMF, estimates the country spent 80% of revenues on servicing debt last year, a ratio that it reckons could rise to 100% this year.