An ongoing theme for 2017 in the CEMEA primary market, as it was for much of 2016, is likely to be a scramble to cover budget deficits by oil reliant sovereigns, brought on by sustained low oil prices. This is not confined to the Middle East either as the Federal Republic of Nigeria is set to hit the road on Feb 3rd for a new USD-denominated benchmark sized issuance.
The B1/B/B+ rated sovereign has enlisted the help of Citi and Standard Chartered Bank for the roadshow, a potential subsequent 144a/RegS bond would carry a maximum maturity of 15 years.
At present Nigeria's USD curve only extends out until Jul-2023, hence any issue longer than 6yrs would push out duration. This Jul-2023 line was issued in conjunction with a Jul-2018 note in an offering that totalled USD1bn when the sovereign last tapped the international USD market in July 2013.
For reference, the Jul-2018 line was bid ca. mid-swaps +304bp (equivalent to yield of 4.39% and UST +319bp) whilst the Jul-2023 line was seen at mid-swaps +478bp (equivalent to yield of 6.92% and UST +501bp), both shortly after the roadshow announcement.
Extrapolating these (Jul-2018 & Jul-2023) would put fair value for a theoretical Feb-2027 (i.e 10yr) line at mid-swaps +603bp and at mid-swaps +776bp for a Feb-2032 (i.e 15yr) bond.
Nigeria also has an outstanding Jan-2021 line that was issued back in 2011 and was seen bid today at mid-swaps +447bp (equivalent to yield of 6.34% and UST +442bp). Extrapolating this line and the aforementioned Jul-2023 would put fair value at mid-swaps +522bp and +584bp respectively for theoretical 10 and 15yr lines.
Its also important to consider the significant curve steepening seen in Nigeria's debt over the past 2 years. Since the Jul-2018 issue was priced it has tightened significantly from reoffer at mid-swaps +381bp to the above noted +304bp. In contrast the Jul-2023 widened over the same period from +393bp to the +478bp seen this morning.
The 2018-2023 curve has steepened some 160bp since July 2013, hence a significant extension of 10 or 15yrs will likely offer a healthy pick up to compensate.
Economic fundamentals and the economy's reliance on oil is also significant. The Nigerian economy saw negative GDP growth rates for 3 consecutive quarters of 2016 with inflation coming in at 18.6% in December last year. Foreign investment has also slumped recently, contributing to the IMF's estimation that the economy shrank by 1.7% in 2016.
With the OPEC output agreement holding firm for now, some oil related concerns have been put on the back burner with expectations the black stuff will remain above USD 50/brl. Nonetheless, given the economic struggles and suggested curve extension, Nigeria could well have to pay up for its return to the Eurobond market.
Finally, away from the Nigeria's outstanding debt, there are other single B rated African sovereign's which can be used for reference as follows, although it should be noted that in comparison to some of its peers in particular, Nigeria's bonds trade significantly tighter.
(I-spread bid levels)
GHANA 8.125% Jan 2026 @ m/s +635 (8.60%) B1/BB+/B+
GHANA 10.75% Oct 2020 @ m/s +610 (8.58%) B1/BB+/B+
GABON 6.950% Jan 2025 @ m/s +585 (8.13%) B1/NR/B+
ZAMBIN 8.970% Jul 2027 @ m/s +650 (8.84%) NR/B/B
ZAMBIN 8.500% Apr 2024 @ m/s +618 (8.377%) NR/B/B
KENINT 6.875% Jun 2024 @ m/s +530 (7.512%) NR/B+/B+
ETHOPI 6.625% Dec 2024 @ m/s +605 (8.295%) B1/B/B
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