Nigeria’s return to the international capital market last where it raised $1.25 billion through Eurobond issuance was a clear demonstration of the country’s attractive credit, Egie Akpata, Chairman, Skymark Partners Limited, a Lagos based firm, has said.
Nigeria raised the amount via a deal closed late on Thursday at the rate of 8.375 percent for a seven-year tenor.
“It is actually very impressive that such a large transaction could be executed in this economic and geopolitical environment. It shows that Nigeria credit is very strong and appealing in the market as our economic metrics are much better than those of several popular African Eurobond issuers,” Akpata said in response to questions from Daily Trust.
The bond issue occurred the day after the US Federal Reserve increased its rate by 0.25%, Akpata noted. It is very unlikely that the FGN could have raised over $1b at a materially lower rate than 8.375%, he added.
The rate increase by the US Fed on Wednesday had been anticipated by the market for the past few months, as have a number of rate hikes in 2022. Hence the increase in bond yields globally, said Akpata, who has closed transactions in Debt and Equity Capital Markets, and Mergers & Acquisitions, worth over N2trillion in the past 12 years.
He believes, however, that as these rate hikes are implemented by the US Federal Reserve, borrowing in the Eurobond market will likely get more expensive if it results in material increases in the yields of US treasuries.
Noting that the FG will most likely need to return to the Eurobond market for more significant borrowing, $3-6b, he opined that would be at a higher cost. “That borrowing will get more expensive as the year goes on so it is in their best interest to come to the market sooner rather than later,” he said.
“FGN Eurobond issues are priced at a fixed spread over US Treasuries. US treasury yields are likely to move up further as the US Federal Reserve continues to raise rates for the rest of the year.”
On the rate hike, he noted that not all central banks will follow the US Fed to raise rates. The Bank of Japan, for instance, has said they would not. The Central Bank of Nigeria is unlikely to follow suit but the Bank of England had already started hiking rates before the US Fed and will likely continue to do so, Akpata noted.
So, is it time for the government to borrow locally, given the rising rates on the international capital market? First, Akpta notes that the FG’s initial budget had around N2.51trillion in local borrowing, which means via TBills and Bonds. According to him, it is not clear where the borrowing to fund the N2.53trillion budget for fuel subsidy will come from, he believes it is likely to have a large local component. “This means the FGN will borrow well over N3trillion from the local market this year. Such record amounts might crowd out private sector debt issuers, particularly if the FGN pays a lot more than current rates in order to attract demand.”
He argues that the FG needs to issue substantially more in the Eurobond market as the money to fund fuel subsidy is foreign exchange used to pay for imports. Naira borrowing, he points out, cannot solve an import problem given the strain on reserves which don’t seem to be benefiting from abnormally high oil prices of over $100 per barrel.
“As long as the CBN coordinates with the DMO and keeps local market conditions liquid, the FG should be able to meet their Naira borrowing requirements at reasonable interest rates,” said Akpata, who has extensive experience in financial markets having worked at BMO Financial Group in Toronto, Deutsche Bank AG in New York, United Capital PLC and UCML Capital where he is a Director. (Daily Trust)
