* Sovereign slashes pricing on new bonds
* Investors pile in
* Bonds trade higher on the break
By Sudip Roy
LONDON, Feb 10 (IFR) - Nigeria tightened the screws on its
first US dollar deal in more than three years on Thursday as it
crunched pricing by 62.5bp off the back of a hefty order book.
The West African sovereign, rated B1/B/B+, tempted investors
with initial talk of 8.50% area, or roughly the low 600s over
swaps, on a US$1bn 15-year.
In spread terms, that was a pick-up of more than 130bp over
Nigeria 2023s - a much bigger difference than for other Single-B
sovereigns. The 10s/30s curve for Egypt (B3/B-/B), for example,
is only 75bp.
But after a series of price revisions, Nigeria sold the
bonds at 7.875% after final demand reached about US$7.7bn.
Investors, who had hoped for at least an 8% yield, covered up
"A lot of investors were hoping this deal would print with
an 8 handle, but at 7.875% with very strong demand - final books
were over US$7bn - I would expect most to stay in the deal and
the bonds to trade just fine," said Michael McGill, emerging
markets portfolio manager at Aviva Investors.
The book was helped by a couple of big orders from the
outset and steadily grew from there. As such leads were able to
move from IPTs of 8.5% area to guidance of 8.125%-8.375%, then
to 8% (plus or minus 12.5bp), and then to the tight end of that
"I think it prints at fair value so there is probably not
much left when looking at valuations. Having said that, they
issued at the right time and the market is clearly in a risk-on
mode, which might support the issue in the next few days," said
Delphine Arrighi, emerging markets portfolio manager at Old
Mutual Global Investors.
The bonds traded up on the break by 1.75 points from their
par reoffer level.
The trade once again demonstrated how technicals outweigh
fundamentals. "The macro story has not improved but the scarcity
of issues in Nigeria is definitely a strong support," said
Arrighi. The sovereign has only US$1.5bn outstanding in
international debt markets and last issued in July 2013.
The US$1bn - the maximum that parliament decreed the
sovereign could borrow - will help make up for shortfalls in its
The country is suffering from its first recession in 25
years. Real GDP growth was negative last year, according to
Moody's, while annual inflation is at 19%.
Nigeria's finance minister Kemi Adeosun told IFR that
"resetting the Nigerian economy takes more than a few changes in
She added: "To lay the foundation for Nigeria's future we
must correct the historic underinvestment in infrastructure that
has limited our growth to a few sectors. The government's debt
strategy is an essential part of this process. Today, our debt
profile is unbalanced. We borrow heavily domestically, with too
short a tenure, and at a high cost.
"The impact of this is that we spend too much on interest
and we crowd out the private sector from borrowing to fund their
investment plans. This debt structure does not support our long
term growth ambitions, and so it must be amended. We need longer
term and cheaper finance to support the infrastructure
investments we must make. The Eurobond issue was the first step
in this process."
One thing in Nigeria's favour is that leverage levels are
relatively low - gross debt was about 15% of GDP in 2016,
according to the IMF. But the general government balance to GDP
ratio was -2.9% last year, according to Moody's, and the current
account balance -0.6%.
Analysts are hopeful that more stable commodity prices
should start improving government finances.
"Nigeria's economic growth and US dollar earnings are likely
to gradually improve in 2017, supported by a recovery in oil
production and oil prices," said Moody's on Thursday.
That recovery, though, will depend on how well the
government is able to stand up against militant attacks in its
oil-producing heartland, the Niger Delta.
There are also concerns about a shortage of dollars, which
Fitch cited last month as one reason for the outlook revision on
its B+ rating to negative.
"Access to foreign exchange will remain severely restricted
until the Central Bank of Nigeria can establish the credibility
of the Interbank Foreign Exchange Market and bring down the
spread between the official rate and the parallel market rates,"
In the spot market, the naira had settled in a range of
N305-N315 against the dollar when Fitch published its report.
The bureau de change rate fell to N490 against the dollar in
November, though Fitch says BDC operators subsequently adopted a
reference rate of N400 to help the parallel market converge with
Citigroup and Standard Chartered were leads on the 144A/Reg
(Reporting by Sudip Roy; additional reporting by Robert Hogg;
editing by Julian Baker)