Hurrah, back to the Eurobond market
The Debt Management Office (DMO) last week announced plans to raise US$2.5bn by mid-November from the sale of Eurobonds, with perhaps an element of diaspora paper to bulk out the exercise. This would cover the greater part of the projected external financing of N1.07trn (US$3.5bn) in the 2017 budget. The FGN is well placed to tap a receptive market, not least because its external debt at end-June amounted to just 3.9% of estimated 2017 GDP. We fully endorse this initiative.
- The DMO has a medium-term target of 60/40 for the blend of its domestic and external obligations. The ratio stood at 72/28 at end-June. If we add the Eurobond issuance plus the FGN’s proposal to convert maturing NTBs into short-term USD instruments up to a ceiling of US$3bn, we arrive at a ratio of about 65/35.
- Some analysts may be uncomfortable with this shift. However, we point out the substantial interest rate differential in favour of external borrowing. Nor, in the boldness of our position, have we overlooked the normalisation of US monetary policy in the months ahead.
- The Eurobond plans have to be endorsed by the National Assembly, as is the case with the proposed debt restructuring.
- These planned changes in the currency mix of the debt help to explain the narrowing of yields on FGN naira bonds of up 200bps in the middle and long end of the curve. We learn from the DMO’s provisional issuance calendar for Q4 2017 that it is to offer its in-demand ten-year benchmark (Mar ‘27s) in all three months.
- USD denominated Eurobond issues by frontier/emerging market sovereigns are highly popular in the market. In early September Tajikistan issued for the first time, raising US$500m for ten-year paper at 7.125%. The issue pushes its external public debt/GDP ratio up to 50%, and was rated B-.by S&P (one notch below Nigeria).
- Earlier this week Jordan came to the market for the second time this year, raising US$1bn for 30-year paper at 7.375%. Its public debt ratio stands at around 90% of GDP. Demand is also strong for higher quality debt. Saudi Arabia has raised US$12.5bn, with the 30-year tranche priced at just 180bps over USTs.
- Yet on the grounds that the window of opportunity can close suddenly, we urge the FGN to secure the necessary approvals and push ahead with haste.