“The support of higher oil prices will help Nigeria,” Viktor Szabo, a money manager at Aberdeen Asset Management, which oversees about $10 billion of emerging-market bonds and stocks, said by phone from London on Thursday. “I’m not sure it’ll be long-lasting. OPEC hasn’t decided on the details. We could stay stuck in the range of $45 to $50 per barrel. Still, for now there’s significant demand for anything with a high yield.”
Even as Nigeria, heading for its first full-year contraction in 25 years and in need of funding to cover a record budget deficit, may take heart from the performance of its dollar debt and OPEC’s agreement to cut oil production as the West African country prepares to tap the Eurobond market for the first time since 2013.
Demand for the nation’s U.S. currency-denominated securities drove yields to the lowest in 15 months, handing investors returns above the emerging market average this year. In contrast, its local-currency bonds are the worst performers among peers, according to data compiled by Bloomberg. The dollar bonds have been helped by the clamor for yield as developed nations from the U.S. to Japan hold interest rates at or near record lows.
The gains of Nigeria’s dollar notes signal investors are comfortable the government has sufficient reserves to cover its foreign obligations. And high demand for Ghana’s Eurobond earlier this month bodes well for Nigerian Finance Minister Kemi Adeosun’s plan to issue $1 billion this year, according to NN Investment Partners in The Hague.
“There’s appetite for African risk,” Marco Ruijer, who oversees about $8 billion of emerging-market debt at NN Investment, including Nigerian Eurobonds, said by phone on Sept. 27. “They could do a deal quickly, even next week, if the oil price stays stable. And they could issue more than $1 billion if they wanted, depending on the price.”
Nigeria is the continent’s second-biggest oil producer, and relies on crude for 90 percent of exports. The 50 percent slump in prices since 2014 has left the government with a funding shortfall of 1.8 trillion naira ($5.7 billion) this year.
Brent crude oil prices rose 5.9 percent on Wednesday, the most since April, after OPEC members, including Nigeria, agreed in Algeria to reduce production to a range of 32.5 million to 33 million barrels a day. Brent dropped 0.4 percent to $48.51 on Thursday. Yields on Nigeria’s $500 million of securities due in July 2023 fell 1 basis point to 6.63 percent by 3:12 p.m. in Lagos, after rising for the previous four days.
Yields on Nigeria’s 2023 bonds have dropped from a record 9.37 percent on Jan. 15, a gain of 23 percent for bondholders in the period. That compares with average profits on emerging-market sovereign Eurobonds of 16 percent, according to Bloomberg indexes. Nigeria’s local-currency securities, meanwhile, have lost 7.9 percent this year, the only debt to decline in 31 emerging markets tracked by Bloomberg.
Nigeria last sold a Eurobond in July 2013. A deal this year would come in the wake of West African neighbor Ghana’s sale of $750 million of debt on Sept. 8, which was more than four times oversubscribed. Nigeria would probably have to offer a yield of around 7.25 percent to 7.35 percent on a $1 billion 10-year bond, and closer to 7.5 percent on a bigger deal, Ruijer of NN Investment said.
Investors would be forgiven for steering clear. The economy is set to contract 1.8 percent in 2016 according to the International Monetary Fund. Oil production is close to a three-decade low as militants bombpipelines in the Niger River delta, and Islamist group Boko Haram’s insurgency has left people in the northeast of the country facing the world’s worst food shortages, according to the United Nations Children’s Fund.
But with $24.6 billion of reserves, investors aren’t concerned that Nigeria would default on its $1.5 billion of outstanding Eurobonds. Its debt is equivalent to 13 percent of gross domestic product, the lowest level in sub-Saharan Africa, according to the IMF.
The dollar bonds “could easily be redeemed from existing reserves and are even more easily serviced, at a cost of $91 million annually,” Alan Cameron, an economist in London at Exotix Partners LLP, which recommends that clients hold the securities, said in a note on Sept. 26. “If Nigeria took full advantage of the current sentiment and liquidity conditions globally, we think it could easily issue $2 billion.”
Not all investors are convinced the securities yield enough to make up for the risks. While Nigeria may have little debt, the downturn has hammered its revenue and it could end up spending as much as 35 percent of income servicing its interest obligations, including naira bonds and loans to multilateral lenders, according to the Budget and National Planning Ministry.
Although Nigeria’s low debt levels make it attractive, its debt-service costs as a proportion of overall spending are high relative to other oil producers such as Angola and Gabon, Ken Colangelo, a fixed income economist at AllianceBernstein LP, which oversees almost $500 billion of assets, said in an interview in New York on Sept. 19. That “makes the credit less solid and does not justify the much tighter spreads,” he said.
Angola’s bonds due in November 2025 yield 9.56 percent, while those of Gabon maturing in June 2025 have yields of 8.25 percent
There should still be enough demand to ensure Nigeria’s deal goes smoothly, according to Lagos-based Vetiva Capital Management Ltd.
“This is a relatively good time for Nigeria” to tap the market given the rally in its bonds since January, Michael Famoroti, an economist at Vetiva, said by phone on Sept. 26. “We will be expecting a yield of somewhere around 7 percent.”