Culled—Proshare
October 4, 2016/ARM Research
Last week, Bloomberg reported that Access Bank Plc (Access) plans to tap the Eurobond market for a five-year issue to be utilized for ‘working capital and lending to investment grade borrowers’.
In addition, Access filed a notice on the Irish Stock Exchange that it was considering all options for refinancing, including a potential exchange offer for its existing senior unsecured US $350 million 7.25% notes due July 2017.
Setting sail early?
2016 has been a difficult year for African Eurobond issuance as concerns over the softening growth picture across the continent dimmed appetite for SSA sovereign credit.
The weak market reception early in the year had adversely impacted corporate issuance and largely underpinned GTB’s decision to redeem its May 2016 bond vs. going down the refinancing route. However steady tightening in credit spreads on Nigeria’s 2021s and 2023s over similar dated US Treasuries and recent oversubscription of Ghana’s Eurobond has re-awakened interest in African paper.
Interestingly, the improvement in market pricing for Nigeria has occurred despite a one-notch ratings downgrade from S&P early this month and Nigeria’s official entry into recession.
But likely higher pricing raises concern on deployment?
That said, as global financial conditions are much changed from 2012, Access faces increased prospects of refinancing at a higher cost with the closest fixed-rate corporate Eurobonds currently trading at spread of 250-300bps to FGN Eurobonds.
The possibility of more expensive financing raises concerns over the likely outlets for deployment of these funds in a deadbeat economic climate. However, the bank noted during discussions that it intends to target sectors receiving favourable economic policy treatment.
While banks do not necessarily lend at the marginal cost of funding, we think Access could struggle to find high quality obligors given the current recessionary environment. However, Access could yet find a local counterparty in the CBN for cross currency swaps with the apex bank continuing to enter such positions in Q2 16 after slowing down in Q1 16.
On impact on funding costs, our discussion with Access reveals that average funding cost on the dollar side of its balance sheet is circa 2.5% which implies much lower costs on dollar deposits (H1 16: $1.8 billion).
Assuming funding costs on other dollar liabilities remain intact, we estimate that potential refinancing at 8.5-9.5% could raise dollar funding costs by 20-30 bps from current levels. Given share of dollar deposits in funding structure (H1 16: 38%), the more expensive funding translates to a 10-15bps bump in WACF by our estimates.
In terms of valuation, as the issuance is largely to replace maturing debt (it does not necessarily raise interest earning capacity), we see impact more on funding costs beyond FY 16.
On this front, increased prospects for monetary easing over 2017 (as inflation declines and pressure increases on CBN to complement expansionary fiscal policy) drives scope for tamer naira funding costs to mute effect of more expensive FCY refinancing. Thus, we retain our positive view on Access with our STRONG BUY (FVE: N8.26) rating intact.
