Wednesday, 12 December 2018

Delayed debut

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Five years after awarding its first sovereign mandate, Nigeria became sub Saharan Africa’s fifth sovereign Eurobond issuer in January 2011. A rather underwhelming debut reflected the country’s political and financial uncertainties but the bond still performed well in the secondary and should encourage more inaugural offerings from the continent. John Weavers reports.

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The Federal Republic of Nigeria (NR/B+/BB–) made its long-awaited bow in the international bond market in January 2011. The US$500m 10-year Reg S/144a transaction was not without its problems, with negative press reports souring the tone in the run-up to launch. In particular, a front page Financial Times article reported big investors’ concerns about huge outflows from the country’s excess crude account during a period of buoyant oil prices.

The debut 6.75% 2021s attracted a reasonable book of US$1.25bn and priced 356.6bp wide of Treasuries, in a deal arranged by Citigroup and Deutsche Bank. The reoffer spread over mid-swaps of around 350bp meant that it came flat to the Ghana October 2017s and about 80bp wide of the Gabon December 2017s on a swaps basis, which was viewed in some quarters as a disappointing result. A syndication manager away from the deal said at the time that there had been an expectation that Nigeria would price through Ghana, though a banker close to the deal retorted by arguing that Ghana would have to price a new issue in the 7.25%–7.50% area at that time.

While some leading funds steered clear of the transaction, others were happy to participate. It was Sub-Saharan Africa’s fourth (non-South African) sovereign issue in the last 30 years, following Ghana and Gabon’s benchmarks in late 2007 and Senegal’s modest US$200m 8.75% Reg S five-year printed in December 15 2009.

Fund managers were allocated 70% of the Nigerian debut offering versus 12% for banks and private banks, 10% for hedge funds, 5% for insurance companies and 3% for others. UK investors took 42%, the US 38%, Europe 15% and other destinations 5%.

It was, perhaps, just as well that Nigeria limited the issue size to US$500m as it would have been “extremely difficult to have got something bigger away without offering a significantly higher premium”, suggested a rival syndication manager. Many investors must have been wary of the political risk associated with Nigeria: its political violence remains a massive problem, with hundreds reported killed in the wake of President Goodluck Johnson’s “re-election” in April 2011.

Nigeria’s sovereign debut from Africa’s most populous country had certainly been a long time coming. Citigroup, JP Morgan and Merrill Lynch had been mandated for a debut benchmark US dollar Eurobond back in 2006. The authorities subsequently switched their plans to a naira-denominated international issue but this too was shelved by the Finance Ministry in March 2009 because of the deteriorating financial situation.

Nigeria also has two non-sovereign Eurobonds outstanding: the Guaranty Trust Bank US$350m 8.5% 2012 and the First Bank of Nigeria US$175m 9.75% 10-year non-call five Lower Tier 2 Reg S Eurobond that were launched in January and March 2007, respectively.

Nigeria is not the only borrower giving investors pause. The Ivory Coast’s default of its restructured US$2.3bn 2032s has also been a negative for the region, but investors and analysts stress that each country is judged on an individual basis. There are plenty of stable countries from the sub continent to do business with. 

Looking ahead Angola (B1/B+/B+) is looking to launch a debut US$500m Eurobond in September 2011, according to Finance Minister Alberto Lopes.

Strong secondary

Investors will be encouraged by the performances of the Ghana 8.5% 2017s and Gabon 8.2% 2017s which have rallied to 112.5 and 115.6 to yield 6.1% and 5.36% respectively since coming to market.

Even the Nigeria 2021s had climbed, to103.5 by the end of April (6.26% yield) from January 2011’s 98.223 reoffer price, despite the ongoing political violence. Its spread to Treasuries tumbled from 356.6bp to under 300bp at the end of April.      

Tanzania, Zambia and Uganda are among other potential debutants, while Kenya has indicated it will launch its inaugural deal either in this fiscal year (up to June 30 2011) or the next.

Meanwhile, Ghana is still preparing for a second Eurobond that had originally been scheduled for the end of 2010, according to finance minister Kwabena Duffuor. Duffuor said in October 2010 that Ghana (NR/B/B+) was considering a second Eurobond to raise US$500–$700m following on from its 10-year debut launched in October 2007.

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