What ’ s in the Eurobonds for the Private
Calvin Ebun-Amu
FUNDS
Investor ?
The Nigerian government has turned to the Eurobonds , a dollar debt instrument , for funding of its fiscal operations . It is an investment worth considering . Here is the reason why .
Eurobonds are denominated in the currency other than the home currency of the country or market where they are issued . Contrary to popular belief , the term does not mean the bond was issued in Europe or denominated in the euro currency . Usually , the Eurobond is denominated in dollars . Issuance of the bonds are usually handled by financial institutions on behalf of the borrower . The purchase of the entire issue may be guaranteed by one of such institutions who underwrite the bond .
Eurobonds are advantageous in that they offer a high degree of flexibility for issuers who seek to choose the country of issuance based on the regulatory market , interest rates , and depth of market . Their attractiveness to investors also stems from their small par values and high liquidity . Nigeria ’ s $ 1 billion Eurobond was the first issue since 2013 which was oversubscribed by 780 %. It is the first foreign currency denominated bond to be listed on the Nigerian capital market . A significant proportion of demand was from fund managers . US investors accounted for the majority of the demand for the bonds . The 15-year domestic Sovereign Eurobond was priced at par and at a coupon rate of 7.875 %. Interest will be paid each year for the next 15 years following which a bullet repayment will be made . The principal listing , facilitated by the Debt Management Office ( DMO ), was on the London Stock Exchange ( LSE ) while the secondary listing was on the NSE and FMDQ , monumental achievements which are reported to have increased liquidity in both the secondary markets and the FX markets .
Adeolu Bajomo , Executive Director of the Nigerian Stock Exchange for Market Operations and Technology said , “ The listing of the dollar denominated bond on the Exchange will boost price discovery and liquidity in the local market as well as help attract reliable long term foreign currency denominated funds into the financial market . It will also set the foundation for raising and listing more foreign denominated securities in Nigeria which will open up additional capital raising options for issuers and portfolio diversification opportunities to investors ” The pound to Naira rate is favourable for the UK investor who may be able to attain a highly liquid investment . However , the forex risk associated with the investment must be considered . A UK investor may , for example , part with $ 1000 for Eurobonds which after 15- year maturity may change to $ 700 .
The dollar value against the Naira makes the Eurobond an attractive investment for private investors in Nigeria as forex scares continue to loom . The coupon should also be considered . Interest rates rising and causing prices to fall could potentially have positive effects if an investor is looking for high rates . However , those looking to sell may hope for lower interest rates . This may be unlikely over these years . Nevertheless , the notes provide higher coupon rate than some other potential investments .
Among potential red flags , repayment risks may need to be considered by investors as the bullet repayment structure of Nigeria ’ s bonds puts significant pressure on the Nigerian government to pay back its debts following dates of maturity . In 2021 , $ 500 million ( issued in 2011 ) will have to be paid by the government . Following that , another $ 500 million will have to be paid back . Additionally , approval has been sought for a $ 500 Eurobond . These are significant pressures for an economy just under $ 60 billion in debt . As a bullet bond , the $ 1 billion Eurobond may be more expensive for investors to purchase in contrast to callable bonds which can be redeemed prior to maturity date .
Inflation risks , credit risk , repayment risk are issues of concern which shed light on the divergent needs of investors .
Zero-risk treasury bills may be considered as good alternative investments . Treasury Bill yields have been as high as 20 % , trading for a one year yield . However , the recent announcement by the Federal Government that it will no longer sell Treasury Bills to retail investors means that a minimum of N50 million is required to invest . This may be of concern , depending on an investor ’ s strategy for their portfolio . The rising inflation rate of Nigeria and future oil prices are some of the key factors to consider in this regard . Shifting winds in regulatory standards and forex positions continue to shape the narrative for investment decisions made in the markets . For increased probability of relative success , the barbell strategy may be adopted , thus an investor accepts that many measures / maturities are flawed and steers clear of maturities of intermediate length . Investing in long-term bonds ( more than ten years ) and short-term bonds ( under three years ) may prove to be more favourable for an investor . This strategy , however requires continuous engagement by an investor , more so than the bullet strategy , which typically makes an investor immune from interest rate movements .
Calvin Ebun-Amu is passionate about the emerging markets of Africa and many other aspects of the global economy . He is a law graduate with a leaning towards the financial industry . He enjoys reading and writing articles , with an emphasis on the African markets and the effects of how the global financial markets affect Africa . Read more from him at http :// themarketmogul . com
invests . ng - MARCH / APRIL 2017 9