Senegal raises $1.1 bn Eurobond at lower cost than Nigeria’s $1.5 bn

by | May 18, 2017 11:40 am

Senegal has been able to raise US$1.1 billion in Eurobonds at a lower cost than Nigeria will pay for a $1.5 billion bond floated earlier this year.

Analysts say this indicates foreign investors are less comfortable lending to Africa’s most populous nation, than they are to regional neighbour Senegal-home to some 15 million people- as both countries reap mixed economic fortunes.

Senegal raised the said Eurobond on Tuesday, at a yield of 6.25 percent, 162 basis points lower than the 7.87 percent yield demanded from Nigeria for separate issuances of $1 billion and $500 million. Yields on Nigeria’s outstanding $1.5 billion bond maturing in 2032, eased to 6.79 percent on Tuesday, according to data sourced from Bloomberg.

“It reflects Nigeria’s economic condition and the fact that we went borrowing at a time we were broke” said Tajudeen Ibrahim, head of research at investment firm, Chapel Hill Denham.

“When a country borrows amid an economic recession and dwindling revenues, its pricing capacity reduces and investors demand a risk premium, as was the case with Nigeria,” Ibrahim said by phone. “Senegal on the other hand, is enjoying an economic boom and is fast becoming an investor’s delight.”

Nigeria, once an investor’s darling itself, fell out of favour after oil prices and output slumped and the economy contracted last year, for the first time in almost three decades. The economy is however now tipped by the IMF to grow 0.8 percent this year.

To see through big increases in public spending and shore up a wider budget deficit, occasioned by a slump in oil revenue, officials turned to the international capital market in February, for the first time in four years, to raise $1 billion which was soon followed by another $500 million in March.

“Nigeria raised funds in a period of unfavourable economic indices, and it’s why it came at such high cost,” said Johnson Chukwu, managing director and CEO of Cowry Assets.

“The price and production of our major export, oil, was down significantly, we were in a recession and had no clear cut economic plan at the time.

“Investors priced in these negative variables,” Chukwu said by phone. “Senegal was better positioned to lure investors after it quickly emerged as one of the fastest growing economies in Africa.”

Senegal’s economy grew by the most in West Africa last year, after Ivory Coast, following a 6.6 percent GDP growth in the period, which is likely to be followed by a 6.8 percent growth this year, according to the IMF.

“It is great for Senegal that they were able to raise money at a relatively favourable interest rate,” said Andrew Nevin, a partner and Chief Economist at Renaissance Capital, as it reflects investor confidence in its economy.

“In Nigeria’s case, the relatively high rate demanded by investors reflects continuing uncertainty about the path of economic development,” Nevin said in an emailed response. “Investors are cautious and very aware of Nigeria’s potential, but are concerned by our poor Ease of Doing Business and confusing FX policies.”

Nevin observes however, that these two issues are now being addressed by the Federal Government, and that if progress is made, could lead to lower costs of dollar borrowing over time.

Nigeria’s dollar management strategy, which saw investors flee the country, was occasioned by the decline in petrodollars but investors are said to be returning, buoyed by a new FX window (Investors’ & Exporters’ Window) created in April for portfolio investors, in an attempt to beat the dollar crunch. The naira opened at N382 per dollar on the window on Tuesday, within N4 of the black market rate.

Senegal’s ministry of economy said the 16-year bond was oversubscribed by some $9.3 billion, $15 billion more than the surplus $7.8 billion bids Nigeria got.

The difference in the Eurobond pricing of both countries captures the extra risk premium placed on Nigeria, due to the macroeconomic weakness through 2016, according to Abiodun Keripe, head of research at Elixir Investment Partners.

“Senegal’s macroeconomic performance through 2016 was strong,” Keripe said. “GDP growth was stable at 6.6 percent, up from 6.5 percent in 2015.  In contrast, Nigeria was embattled by the decline in oil output and price, shortages of power, fuel, and foreign exchange.”

Global ratings agency, Standard & Poor’s, lowered Nigeria’s rating one level to B in March, five levels below investment grade and in line with Kyrgyzstan and Angola.

“After recession in 2016, we expect that increasing oil production and government capital expenditures will support Nigeria’s economic growth rates and export revenues over 2017-2020,” S& P said.

Political stability, a better diversified economy and a stable currency, are also among reasons why Senegal secured a better pricing than Nigeria, according to Gregory Kronsten, head of macroeconomic & fixed income research at FBN Quest.

“No coups since independence, and the governing party and president have several times lost elections and they have always respected the result,” Kronsten said in an emailed response.

Senegal is one of the most stable countries in Africa, with three peaceful political transitions and four presidents since its independence from France in 1960: Leopold Sedar Senghor (1960–1980), Abdou Diouf (1981–2000), Abdoulaye Wade (2000–2012) and, since March 2012, Macky Sall.

On 20 March 2016, Senegal held a referendum to vote on measures to strengthen its political system. The next presidential election is due in 2019, while legislative elections are planned for 2017.

Senegal’s economic prospects have also been boosted by offshore oil and gas finds, after Kosmos Energy Ltd. announced the discovery of a gas field this month that could hold about six times what the U.K. consumes annually.

Senegal’s offering comes as West African peer, Ivory Coast, which has been rocked by a mutiny that ended on Tuesday, looks to sell almost $2 billion of Eurobonds by early June.