GTB to issue a new Eurobond. Guaranty Trust Bank (GTB) is expected to launch a 5-year USD500m Eurobond any day in order to take advantage of favourable global market conditions. It will be the bank’s third external issuance since 2007. The initial yield guidance is allegedly around 6.25%. We suspect the proceeds will serve to finance the power sector and potentially oil and gas and other infrastructure projects as well as a gradual expansion into sub-Sahara Africa.
•Fair value is around 6.0%. Interestingly, the bank has another outstanding Eurobond due in 2016 (USD500m) which currently trades at 4.85%, the equivalent of a spread over UST of 431 bps. Based on the prevailing 5-year US Treasury yield (1.35%), the spread over UST of the GTB 16s, and factoring in a new issue premium, we feel that the GTB 18s will be appropriately priced in the primary market at around 6.0%. Should the yield guidance of 6.25% be confirmed, this would represent a spread over UST of 490 bps, suggesting the deal offers moderate yield compression potential in the secondary market. Furthermore, it is probable that the new instrument will be supported by an extra layer of domestic demand from local financial institutions, which has typically underpinned Nigerian Eurobonds post-issuance.
• The short end of the Nigerian USD curve will see limited re-pricing. While some investors have sold the GTB 16s in recent days to make room for the new issue, the impact has been modest so far and the tightly held notes have remained resilient. The GTB 16s are popular (and scarce) given their low duration, which presumably will prove useful when the FED’s QE tapering eventually starts. Even the 5-year sovereign Eurobond only lost around 20 bps since early November pointing to a limited reallocation of investor holdings at the short end of the Nigerian USD curve. As such, any potential pressure on the GTB 16s and Nigeria 18s will most likely be benign.
• Window of opportunity. GTB is coming back to global capital markets amid a broadly constructive risk tone, as illustrated by relatively contained US Treasury rates (despite a small pick-up in recent days) and on the back of a rally in emerging market Eurobonds in October. With the FED now unlikely to start tapering its quantitative easing programme until March 2014, there is a clear incentive for emerging market issuers to lock in low Eurobond rates.
• Strong brand and track record. We suspect GTB’s Eurobond will generate decent offshore demand given the bank’s track record and strong brand in the market. Besides, GTB will benefit from the obvious demand-supply mismatch in the African corporate Eurobond space, as evidenced by the limited number of outstanding USD bonds issued by regional private sector institutions. Interestingly, the GTB 16s trade tight to the other Nigerian corporate Eurobonds (Access Bank 17s [584 bps over UST], First Bank of Nigeria 20s [Tier II notes; 599 bps] and Fidelity Bank 18s [713 bps]). This mirrors the bank’s robust fundamentals and positive external perception and the Tier-I nature of the existing Eurobond.
By: SAMIR GADIO