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FG’s First 2018 Bond Auction Oversubscribed By 136%



… As DMO plans $2.5bn Eurobond, Sukuk in Q1 2018

Latest information from the Debt Management Office (DMO) has shown that the federal government’s first bond offer for the year – 2018 was oversubscribed by a total of N150 billion, a subscription rate of 136 per cent.

The subscription level was higher for the 10-year benchmark bond, which indicates investors’ preference for longer dated instruments in Nigeria.

The Debt Management Office (DMO) conducted its FGN Bond Auction for January 2018 on Wednesday of this week. Two different bonds were offered: the 14.50 per cent FGN, which is to mature by July, 2021 and the 16.2884 per cent FGN due for payment in 2027.

The DMO allotted a total of N110 billion, which was the amount offered in its circular released ahead of the Auction. The 14.50 per cent FGN JUL 2021 was allotted at a rate of 13.3800 per cent, while the 16.2884 per cent FGN MAR 2027 was allotted at 13.4910 per cent. What that means is that the bonds were at higher rates than the previous auction held last year.

The debt office said it sold N45.12 billion of the 14.5 per cent July 2021 five year bond at 13.38 per cent and N64.88 billion of the 16.2884 per cent March 2027 10 year bond at 13.491 per cent, higher than 13.19 percent and 13.21 percent respectively it fetched at the last auction. The total subscription at the sale was N150 billion.

Traders said investors bought bonds at higher yields at the auction to hedge against a possible rate cut later in the year, as inflation continues to decline, fuelling speculation about the outlook for official interest rates.

The governor of the Central Bank of Nigeria, CBN, had on Wednesday said the monetary policy committee will begin to consider cutting benchmark interest rate which has remained at 14 per cent for over a year. This he said is dependent on inflation rate dropping to between lower double digit and higher single digit. Inflation figure for December 2017 was down to 15.37 per cent.

Investors bid as high as 14.50 percent for the notes. However, the government has been offering debt at lower yields to track declining inflation, which fell for the eleventh month in December to 15.37 percent.

It would be recalled that the DMO had released its Issuance Calendar for Q1, 2018 last week with the details of its Auctions for the quarter. The DMO had stated then that its Issuance Programme is structured to ensure that the funds required to finance the budget deficit would be fully provided in line with its mandate.

Meanwhile, the DMO has disclosed that the country is planning to sell $2.5 billion of Eurobonds in the first quarter to refinance domestic debt as well as raise another Sukuk bond as it looks at opening talks with JPMorgan Chase about being reinstated in its local-currency emerging-market bond index.

Director-general of the Debt Management Office (DMO), Patience Oniha said the $2.5 billion Eurobond will be the second tranche of the $5.5 billion dollar debt of which it raised $3 billion out of it in November last year. The whole $2.5 billion could be raised in one go or in tranches, she added.

She noted that the issuance is however subject to market conditions adding that the government is planning to begin talks with JPMorgan about being included in its government bond index for emerging markets, said Oniha.

JP Morgan had removed Nigeria from its emerging markets index in 2015 due to foreign exchange liquidity challenges had that saw the naira unstable and risking to as high as N500 to the dollar on the streets by January 2017.

Daily trading volumes for the naira have risen to about $200 million from as little as $20 million three years ago, according to Standard Chartered Plc. That bodes well for discussions on returning to the index, according to Oniha. “We would like to get back into the index. The securities trading was never the problem, it was always the foreign-currency liquidity,” which she said has now improved.

The yield on dollar bonds due November 2027 have fallen about 60 basis points since they were issued late last year to 5.92 percent, almost eight percentage points lower than the yield on similar maturity local-currency government bonds.

President Muhammadu Buhari’s administration is selling more foreign debt to help reduce the financing burden from paying double-digit yields on local-currency bonds. That would help free up funds to increase investment in infrastructure and spur economic growth. The International Monetary Fund forecast the economy will expand 2.1 percent this year compared with 0.8 percent in 2017, driven by the oil sector.

She also noted that the government is looking to sell another Sukuk bond that will be tied to specific projects adding that the Eurobond will also be project bound.

Nigeria had in September sold a seven-year Sukuk of N100 billion and used the proceeds to fund development of 25 roads across the country. Due to declining borrowing costs in Nigeria, corporate bond sales are expected, probably after the second quarter as the process of issuing improves, Oniha said.

Of the $3 billion raised in November’s Eurobond sale, $2.5 billion went to funding the 2017 budget, and $500 million to refinancing local debt. Commenting on the planned debt, chief executive of Afrinvest Securities Limited, Ayodeji Ebo noted that tying debt issuance to specific capital projects will be attraction for investors and increase confidence in the government.



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