September 22, 2021/CSL Research

Yesterday, the Debt Management Office (DMO), following two days of sustained meetings with foreign investors, announced that it had raised US$4bn in Eurobonds. The amount raised exceeded the earlier planned US$3bn. Based on the report from the DMO, the offer was oversubscribed with a bid-to-cover ratio of 3.05x, giving room for the additional US$1bn allotted. The successful outing defies the country’s lingering economic frailties that have been further compounded by the emergence of Covid-19, suggesting the issuance was attractive to yield starved bonds. On issue were bonds with three different tenors of 7, 12, and 30 years. The issuance is part of the planned US$6.4bn external borrowings in the 2021 appropriation act, expected to play an active role in actualizing the economy’s short to medium-term fiscal and monetary objectives.

The issuance is expected to flow into the external reserves. Augmenting the recent accretions to the reserve and providing an opportunity for the monetary authority to resume large-scale intervention in the Foreign Exchange (FX) market. This development (assuming no significant withdrawals from the reserve) could drive down rates in the parallel market. We based this expectation on the fact that the additional US4bn would place the external reserve close to the psychological level of US$40bn. As of September 20, 2021, the external reserve closed with a balance of US$35.7bn, having grown 5.0% in the month of September 2021 only. We expect this and the US$3.4bn expected through the International Monetary Fund (IMF) to provide the needed respite in the Nigeria FX market.

The Eurobond also provides the needed fiscal liquidity to meet the Federal Government’s (FG) earmarked appropriation expenditures for 2021, making way for an improved budget performance. Furthermore, we expect, among other things, that by issuing the Eurobonds, there would be more space for sub-national and private issuers to raise funds domestically.

The issuance by the accretion it provides to the external reserves, portends the likelihood of improved economic outlook considering the significance of FX liquidity to further capital flows into the Nigerian economy.

Finally, we also observed that the stop rate at the auction exceeds the yields obtainable at the Eurobond secondary market for similar instruments, implying a probable bearish turn in the space.