High yields on Nigerian Eurobonds are preventing the government from raising new dollar debt, effectively excluding Africa’s second-largest oil producer from the international capital market.
The country’s latest $1.25 billion bond, which matures in 2029 and was issued at a yield of 8.375% just four months ago in March, now has a yield of 13.57%. That’s as of Tuesday, according to data from Bloomberg.
The bond is also trading at a 22.5% discount, as the price has fallen from 100 cents to 77.5 cents on the dollar. This implies that an investor who bought the bond when it was issued lost 22.5% of their money.
Only Eurobonds from Tunisia, El Salvador, Pakistan, Ethiopia, Ghana, Honduras and Kenya sold at a faster rate among peer countries this year.
“We are effectively locked out of the Eurobond market for new issues,” said a source familiar with the matter. “If we are to issue, the price will be 12-14% interest, (that’s) junk bond rates at best.”
Yields on existing bonds are generally an indicator of the cost of raising a new Eurobond.
Rising Euro government bond yields also affect companies, as the sovereign yield serves as the basis for companies.
This implies that while it will cost Nigeria 14% to issue a new Eurobond, any company wishing to raise debt in dollars will now pay at least 15%.
Also Read: For the first time, investors dump Nigerian Eurobonds despite oil rally
Why are Nigerian bonds selling?
Nigeria’s fiscal struggles, including a rising oil subsidy bill and declining oil production, which blunted gains from an oil price above $100, negatively impacted investor sentiment and triggered the sale of bonds.
The World Bank predicts that the country’s oil revenue, the main source of dollar revenue, will fall in 2022 despite rising oil prices.
Nigeria recently canceled plans to sell Eurobonds this year amid fears of being pushed out of a deal by investors who are now treating existing Nigerian notes as junk despite a superior B- credit rating. to that of Ghana, for example, which is CCC+.
A junk bond like the Ghanaian bond offers higher yields than conventional bonds due to the high risk of default associated with them. Ghana, which has a debt-to-GDP ratio of over 80%, was granted junk status due to liquidity problems.
“I was considering buying the dip in April, when the price of a particular Nigerian bond crashed to 80 cents on the dollar because the selloff seemed excessive for a country that has never defaulted and has a ratio debt/GDP by 40%,” said one investor.
“I hesitated; now I feel like I’ve dodged a bullet, going by today’s price and it’s unclear when a rebound will come, next year’s election adding another layer of risk,” the investor said.
Implication of not being able to sell Eurobond
For Nigeria, which has been in debt since the oil price crash in 2016, being shut out of the international capital market could prove very costly. The country’s outstanding debt has more than tripled from 12 trillion naira at the start of 2016 to 40 trillion naira at the end of 2021.
The external debt component rose from $10 billion to $38 billion during this period, with Eurobonds accounting for 37% to $14 billion at the end of 2021, according to data from the Debt Management Office.
Nigeria has also often tapped the Eurobond market to ease the frequent dollar crisis in the economy, and a failure to do so now would mean a weaker exchange rate and higher inflation.
The country may have to turn to the International Monetary Fund (IMF) to fill the void that will result from an inability to tap into the international capital market until conditions improve.
Some analysts, however, are of the view that the conditions attached to an IMF loan could prevent Nigeria from tapping the Washington-based lender, especially with the upcoming elections.
