Banks’ Eurobond chase hits $1.45bn

by | August 1, 2013 1:49 pm

Nigerian banks’ issuance of Eurobond has hit $1.45 billion in the past two years, with the planned additional issuance of $650 million by two banks in the course of the year.

Fidelity, GTB and Access banks have already issued $300 million (2013), $500 million (2011), and $350 million (2012), respectively, with FirstBank currently on a roadshow to issue $300 million.

The planned issuance  include Diamond and Skye banks, which have signalled intention to issue $550 million and $150 million, respectively, before the year runs out. Banks and multinational entities issue Eurobonds for many purposes, including financing for capital and other projects.

The chase for Eurobonds has escalated recently because it has become a veritable source of cheap funding, compared to borrowing in the domestic bond market. Besides, Eurobonds are compelling for the banks, since they help to tamp down pressure of the short-term expectations of shareholders, by way of return on earnings (ROE), as well as helping them to offset the expanded capital access and enhanced corporate profile that come with listing at the equities market.

In addition, most of the banks are desiring to realise their loan growth targets, so as to remain competitive in the market, meet and possibly exceed the 15 percent capital adequacy ratio (CAR) of the CBN, which informs the current race for capital raising.

First Bank of Nigeria, the latest on the road, plans to issue a $300m Eurobond , which has taken it to the UK and US. This is in line with recent reports suggesting that the bank would tap global capital markets this year.

BusinessDay learnt that initial terms suggest that FBN will seek to place a 7-year callable subordinated instrument with a yield guidance of 8.5 percent. The new bond is allegedly callable after five years and is expected to be rated ‘B’ by rating firm, Standard and Poor’s S&P and ‘B-‘ by Fitch.

First Bank is currently rated at BB- by S&P; and B+ by Fitch.

“At such levels, we feel that the forthcoming Eurobond will be fairly valued, offering a spread over 5-year and 7-year United States Treasuries UST of 705 basis points bps and 650 bps,” Samir Gadio, an emerging markets strategist at Standard Bank, London said.

The respective spread differentials between the First Bank of Nigeria 2020s and the Nigerian FGN bonds due 2018s and 2021s will be close to 390 bps and 325 bps.

The other corporate Eurobonds issued by Nigerian banks trade at 465 bps, 583 bps and 661 bps, over UST in the case of Guaranty Trust Bank (due in 2016), Access Bank (2017) and Fidelity Bank (2018).

Gadio says the unsubordinated Guaranty Trust Bank notes are the most relevant benchmark to drive the fair pricing of the First Bank of Nigeria Eurobond; though, the valuations have to be adjusted upwards for the tenor and limited liquidity and size (Guaranty Trust Bank sold USD500m in 2011) as well as the extra premium required to compensate investors for the Tier II nature of the new Eurobond and a new issue premium.

“This will bring the fair value yield to around 8.5 percent-8.75 percent, but the strong brand and reputation of the bank will probably allow it to come to the market near the lower end of this range (if not below),” said Gadio.

Analysts say a number of factors will support the Eurobond sale in view of the recent risk off sentiment by investors towards emerging market dollar bond issuance.

First Bank of Nigeria has established a track record in the market, having issued a $175m Tier-II Eurobond in 2007 and which it called in 2012.

The note paid a coupon of 9.75 percent for the first five years and was theoretically expected to pay 3Month London Interbank Offer rate LIBOR plus 6.54 percent

First Bank is also the largest bank by assets in Nigeria and therefore analysts view it as too big to fail in case of an adverse shock.

Other factors that will support the Eurobond sale include the fact that other domestic banks are natural buyers of Nigerian corporate Eurobonds, as they need to balance their dollar assets and liabilities.


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