February 10, 2017 / 9:02 AM / 8 months ago

Nigeria defies the eighters

* 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 their disappointment.

“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 range.

FAIR VALUE

“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 budget.

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 policy.”

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.”

HOPEFUL

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,” said Fitch.

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 the spot.

Citigroup and Standard Chartered were leads on the 144A/Reg S deal. (Reporting by Sudip Roy; additional reporting by Robert Hogg; editing by Julian Baker)

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