Nigeria Braves Emerging-Debt Plunge With $1 Billion in Bonds
Africa’s biggest oil producer issued $500 million of five-year notes to yield 5.375 percent and $500 million of 10-year securities at 6.625 percent yesterday, according to data compiled by Bloomberg. In January 2011, the nation paid 6.75 percent on dollar debt due 2021 in its first overseas offering and the yield on the securities surged a record 133 basis points in June to 6.02 percent. Yields on emerging-market bonds jumped 73 basis points to 5.80 percent, JPMorgan Chase & Co. data show.
Demand is waning after the Federal Reserve signaled in May and June plans to rein in $85 billion a month of assets purchases that drove borrowing costs to record lows and fueled demand for emerging-market assets. Dollar debt sales this year by developing nations including Honduras and Rwanda have lost as much as 14 percent for investors.
“While the pricing now may not be as attractive as it was, it’s probably best they went into the market now before the Fed’s slowdown in bond buying actually begins later this year,” Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital in Johannesburg, said in an e-mailed reply to questions. “It will only become more challenging for frontier markets to garner interest from foreign investors and more expensive to raise foreign financing.”
Nigeria’s sale was four times oversubscribed, Finance Minister Ngozi Okonjo-Iweala said yesterday on a conference call. Investors in the U.S. accounted for 73 percent of the 10-year note purchases and U.K. buyers followed with 16 percent, according to an e-mailed statement from Deutsche Bank AG, which organized the sale with Citigroup Inc.
“It was a bold move,” Maryam Khosrowshahi, who runs sovereign debt origination for central and eastern Europe, the Middle East and Africa at Deutsche Bank, said in a phone interview from London today. “The transaction went extremely well, which demonstrates that there still is demand and liquidity.”
The extra yield investors demand over U.S. Treasuries to hold the 2021 Eurobonds of Nigeria, the continent’s second-largest economy, has climbed to 377 basis points, or 3.77 percentage points, from this year’s low of 206 in January, data compiled by Bloomberg show.
The yield on two-year U.S. Treasuries touched 0.19 percent in May and that for notes included in the Bank of America Merrill Lynch U.S. High Yield Index reached 5.98 percent, both record lows. They have since risen to 0.34 percent and 6.94 percent, respectively.
“The market will continue to be supportive of emerging markets as emerging-market fundamentals in general remain strong,” Khosrowshahi said. The increase in yields “doesn’t mean that issuers cannot raise financing anymore: the market is there,” she said.
Kenya said it’s seeking a manager for its first foreign bond sale, targeting $1 billion for infrastructure development in East Africa’s largest economy. Ghana said it plans to offer $1 billion later this month in its second Eurobond sale, Senegal may issue $500 million this year and Rwanda sold a debut $400 million of international notes in April.
“The risk metrics in the Eurobond market have been more supportive in recent days and the issuer probably wants to take advantage of this relative turn,” Samir Gadio, a London-based emerging markets strategist at Standard Bank Group Ltd., said in e-mailed comments. “Nigeria will still pay a higher external funding cost than what it could have secured a couple of months ago pre-EM correction.”
Yields on Nigeria’s $500 million Eurobonds due January 2021 rose 11 basis points, or 0.11 basis points, to 6 percent yesterday in London, where they are listed. They declined 14 basis points to 5.86 percent today.
“Nigeria is building a Eurobond yield curve by issuing new five-year and 10-year notes, with outstanding issues now due in 2018, 2021 and 2023,” Gadio said.
The government is raising funds to boost electricity output in a country where demand is almost double the supply of about 4,000 megawatts and blackouts are a daily occurrence.
Nigeria needs $10 billion of infrastructure investment each year to keep up with the needs of the country, home to more than 170 million people, Okonjo-Iweala said in an interview in May.
“The fact that they decided to launch in the current market conditions suggests that there is material need for the funds,” Alan Cameron, a London-based economist at FCMB Group Plc, said in an e-mailed reply to questions. “Although the most recent budget data is not yet available, we know that there was a shortfall in projected federal government revenues of 19 percent in the first quarter 2013, and there was likely a similar if not greater shortfall in quarter two.”
The government is in discussions with Nigeria’s governors on how to carry out future transfers and manage savings in the sovereign wealth fund, which now has $1 billion in assets, Okonjo-Iweala said on yesterday’s conference call. The federal government plans to step up contributions toward the end of the year, she said.
The fund, started in October, was set up to invest savings made from the difference between budgeted oil prices and actual market prices. The government is targeting $5 billion in savings in the fund in the “medium-term,” the minister said.
“We have to build confidence that this money will be well managed and will be well invested,” she said.
Crude production fell to 1.81 million barrels a day in March, the lowest since September 2009, according to data compiled by Bloomberg. Oil theft in the Niger River delta caused production to decline to an average 2.2 million barrels a day in the first quarter, according to figures released by state-owned Nigerian National Petroleum Corp. on April 17.
This year’s budget is based on a production forecast of 2.53 million barrels a day.
Moody’s Investors Service, Fitch Ratings and Standard & Poor’s all rate Nigeria three levels below investment grade.
Fitch said last month that slowing progress on government reforms before 2015 elections is keeping the country from getting a better credit rating, echoing Moody’s, which said in May that the country is also hindered by corruption, weak institutions and vulnerability to oil-price drops.
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