February 2, 2023/United Capital Research
Following the recent Moody’s downgrade of the Nigerian Federal Government (FG) long-term foreign-currency (FCY) and local currency (LCY) issuer, from B3 and B1 to Caa1 and B2, respectively, investors’ sentiments toward Nigerian Eurobonds have turned sour as investors begin to demand higher credit risk premiums on Nigerian Eurobonds. Consequently, we have seen a sharp spike in Nigerian Eurobond yields. We observe that, as the country tries to address legacy issues, fiscal pressures, and FX pressure, the recent downgrade threatens to bring Nigeria’s credit spreads back to distressed territory, which is commonly described as 1,000bps over US treasury yields.
According to data extracted from FMDQ, average yield on Nigerian Eurobonds have climbed by a significant 120bps since the downgrade on Friday, 27-Jan-23, to print at 11.98% as of 31-Jan-23, from 10.78%. According to a report from Bloomberg, Nigeria’s sovereign-risk premium recorded the highest jump in three months on 31-Jan-2023. JP Morgan Chase & Co. also revealed that the extra yield investors demand to own Nigeria’s dollar debt rather than treasuries widened 49bps to print at 780bps. Notably, Nigeria’s currency also came under pressure on Monday, with non deliverable forward contracts plunging to record lows versus the prevailing I&E window FX rate of N461.5/$. For context, the 2-month, 3-month, 6-month, and 12-month contract tenors printed at N514.1/$, N528.0/$, N566.8/$, and N645.0/$.
Looking ahead, we expect the current sentiments surrounding Nigerian Eurobonds to linger to the short-term, in tandem with overall SSA Eurobonds outlook. Also, we expect that the outcome of the Fed’s meeting on 1st Feb-2023 to fuel further bearish sentiments, as we anticipate another hike. However, we expect the aftermath of the current bearish trend to present opportunities for bottom-fishing, as local investors are most likely to buy-on-the dip. Lastly, we expect total Eurobond coupon payment to the tune of $151.8mn to hit the system Feb-2023, notably 93.6% higher than total Eurobond coupon inflow ($78.4mn) in Jan-2023. We believe this expected inflow will stimulate pockets of buy-sentiments in February, as local investors will look to re-invest coupon while taking advantage of lower pricing.
