February 9, 2017 / 11:33 AM / a year ago

Investors eye eight handle on Nigeria's bond

LONDON, Feb 9 (IFR) - Investors are piling into Nigeria’s first US dollar bond since 2013 after the sovereign started marketing a US$1bn 15-year issue at cheap levels.

The deal is more than five times subscribed, according to one investor, although the lead managers have yet to announce an official book size.

Another investor said the bonds are already up over a point in the grey market.

Fund managers are seizing the opportunity to put in orders for what one banker away from the deal said was “the cheapest thing in years.”

Nigeria (B1/B/B+) opened books with initial price thoughts of 8.50% area for the February 2032 bullet maturity.

“I think an IPT of 8.50% is a good starting point to attract interest from investors given that the deal will only be US$1bn,” said Michael McGill, EM portfolio manager at Aviva Investors.

“With the positive start to the year for emerging markets I suspect demand will be strong and the deal will end up printing around the 8% area.”

Another investor agreed that the starting point was attractive but was wary about where final pricing would be.

“I hope it is not going to be less than 8%.”

At a yield of 8.50%, the deal would be coming in the low 600s over mid-swaps area. Nigeria has outstanding 2023 bonds that closed on Wednesday at a Z-spread of 468bp, according to Tradeweb.

That gap of more than 130bp is much bigger than the spread difference for other similar-rated sovereigns - the 10s/30s curve for Egypt (B3/B-/B), for example, is only 75bp.

“Personally I think that 7.75% would be more than enough to draw demand,” said a trader earlier in the week. “Nigeria may have its problems, but so does Argentina and they trade at 7.25%.”

A second trader said he could see pros and cons for Nigeria’s starting point. On the one hand he said it looks very cheap when one considers that Nigeria has a much better debt profile than Egypt or Ghana, for example, with an external debt to GDP ratio estimated to be just 4.2%, according to Moody‘s.

Moreover, while the economy is mired in its first recession in 25 years, 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.

On the other hand, that recovery 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 FX liquidity, which Fitch cited last month as one of the reasons why it revised its outlook 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 is trading at a range of N305-N315 against the dollar.

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.

One investor said the country’s economy remains troubled. “The macro story has not improved but the scarcity of issues in Nigeria is definitely a strong support,” said Delphine Arrighi, portfolio manager at Old Mutual Global Investors.

The 144A/Reg S deal is today’s business via lead managers Citigroup and Standard Chartered. (Reporting by Sudip Roy; editing by Alex Chambers)

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