Nigerian banks’ Eurobonds go with the flow despite macro gloom

by Michael Ogunleye

The strong performance of Nigerian bank Eurobonds is starkly at odds with the country’s dismal economic fortunes and owes much to riding this year’s fixed-income wave, according to several market participants. CEEMEA debt has been fighting fit, buoyed by record fund inflows of USD 26bn chasing thin supply, and Nigerian banks have benefited.

Nigeria is experiencing its biggest economic contraction in 25 years, exacerbated by low oil prices, an FX shortage and an ailing banking sector, said the market participants, but the downturn has not been reflected in the local banks’ outstanding Eurobonds.

“Nigerian banks’ Eurobonds have been strong for a few months now [despite the downturn],” said a London-based researcher. “We started to see a big upturn late last year, which coincided with a number of developments, including OPEC’s decision in November to cut oil production.”

That was credit positive for a number of exporters including Nigeria, she added. Today (5 May) however, oil prices slid below USD 45 a barrel (WTI) for the first time since OPEC agreed to the cuts. As a consequence, Nigerian banks’ Eurobond spreads are slightly wider today, with Access Banks’ 10.5% 2021s widening from 639bps yesterday (4 May) to  651bps today, said one analyst.

OPEC’s cut was designed to drain global oil inventories. In doing so, it overcame disagreements between the group’s three largest producers, Saudi Arabia, Iraq and Iran, and sent crude prices soaring. “As a consequence, we saw a significant improvement in the price of oil, which in turn had a favorable effect on some of the bonds issued from the country,” said the researcher.

“The CBN has also taken steps to improve access to dollars for SMEs, bureaux de changes, and banks, which has alleviated some of the concerns over foreign-exchange [shortages].”

Nigerian banks’ Eurobond yields have fallen well below where they were in November 2016. Diamond Bank and Fidelity Bank’s Eurobond yields fell from around 24% at the end of November, to around 13% today (5 May), the researcher noted.

The yields on shorter dated issues such as that of Guaranty Trust Bank’s 2018 notes have has also fallen, from 6.7% during the same period to just under 4%, she said.

“Nigerian banks’ Eurobond results have also been pretty positive,” said the researcher. “If you look at the ROE and profitability of some these banks, particularly those in the top tier, it’s been very good. We believe there is appetite for Nigerian issuers to come again.”

But a London-based portfolio manager was not as optimistic. Nigerian banks’ Eurbonds have returned 8.6% so far this year but spreads are “not in tune with economic reality,” he said. “There are still a number of variables to consider,” said the portfolio manager. “There’s a shortage of dollars in the system, the sovereign outlook is negative, not to mention the rumours about the President’s health. Personally I’m still concerned about the level of non-performing loans.”

“FBN said recently that NPLs stand at about 26%,” he added. “But the figure is probably closer to 50% if you account for the loans that have been restructured. If these loans go belly-up, they are essentially in a negative capital position.”

First Bank of Nigeria’s 2020s are indicated at 92.75/94, a bid yield of 11.092%, said one Africa-based trader. “We don’t have a history of large repayments to use as barometer [during this downturn] either, so let’s see what will happen,” he said.

The portfolio manager was more optimistic about another Nigerian financial credit, Access Bank. The tier-one bank tapped the Eurobond market last year with a USD 300m 10.5% 2021 note. Those bonds have performed well since, and are currently bid at 108 to yield around 8%. “I’m less concerned about them,” he said. “Their NPLs are around 2.3% and their exposure to oil and gas is not as high. Plus they are expected to use some of the capital from the last year’s issue to pay off bonds maturing later this year.” Access Bank has a USD 350m 7.25% bond maturing in July.

The portfolio manager said that he would not yet reduce his overall exposure to Nigerian bank debt, but will be monitoring his positions closely. Sub-Saharan African debt has tightened about 39bps over the last 30 days, he noted, with Nigerian banks’ Eurobonds tightening by a whopping 135bps. “Spreads are too tight [for Nigerian Eurobonds], but in this environment people are just chasing returns,” said the portfolio manager. “Investors are hunting for yield, they are going for the ‘creme de la creme’ in terms of returns, so these days anything goes.”

Elsewhere in Africa

The Sub-Saharan African bond market is trading slightly wider this week. Spreads are on average around 5bps to 20bps wider, according to one London-based trader’s pricing metrics. “We rallied into the build up to the FOMC meeting, but subsequent to that, we saw some selling. Clients started to reduce their positions off the back of the spike in US Treasury yields following the Fed meeting, and the fall in the oil prices,” the trader said. US Treasury yields are seen at 2.36% today, from 2.28% on Monday.

Oil exporters took the biggest hit with Nigeria’s 7.37% 2032s dropping one point over the last 24 hours  to 107/108, he added.

Meanwhile, South Africa’s bonds are in good shape, despite the country being beset with internal political battles in recent weeks.  “South Africa is holding up pretty well, in general both corporate and sovereign bonds are almost at pre-downgrade levels, and we haven’t seen much selling,” said a second trader. The sovereign’s 2025s are at 109 -mid for a 238bps z-spread versus a 110.5 mid-cash price pre-downgrade levels.

Elsewhere Zambia  was flagged as an outperformer by one analyst. This is despite the Zambian president having said that he may declare a state of emergency in Africa’s second-biggest copper producer, due to turmoil following nation’s main opposition leader being put on treason charges. United Party for National Development (UPND) leader Hakainde Hichilema was apprehended last month, and was subsequently charged with trying to overthrow the government. Zambian bonds took a hit after the news but have since stabilised. Its 2027s fell to a bid cash price of 103.9  following the news, but are now seen at 106.50/107.

In terms of forthcoming deals, Senegal will commence on 8 May an investor roadshow to market a US dollar-denominated benchmark bond. Citigroup, JPMorgan, Natixis, Societe Generale and Standard Chartered are arranging the transaction.

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