Investors take FGN $500m bond to oversubscription

• Experts project 100 per cent intake •Final allotment to beneficiaries this week

Nigeria’s first domestic foreign currency-denominated bond recorded significant oversubscription, underlining investors’ confidence in the country’s economic outlook.

It was learnt at the weekend that the medium-term $500 million bond witnessed overwhelming subscriptions from local and foreign investors.

It closed as a landmark transaction that ushered in a new window of foreign exchange (forex) to governments and companies.

The Debt Management Office (DMO), which oversees the government’s debt issuances and management, is expected to make final allotment results this week.

Sources with knowledge of the provisional allotments said the offer book was about $1 billion.A breakdown of the subscription pattern showed considerable appetite by individual retail investors and institutional domestic investors.

There were also appreciable subscriptions by the diaspora community and foreign investors, although the stringent requirements within the week-long offer period appeared to have moderated subscriptions by retail diaspora investors.

An investment banking source said subscriptions were more than $800 million while other sources said the success level of the bond was around $1 billion, 100 per cent above its initial offer size of $500 million.

Sources said the DMO would take advantage of the overwhelming confidence by increasing the final issuance size, thus shortening the cycle of tranches in the bond’s total programme size of $1 billion. 

The Series I $500 million Domestic FGN US Dollar Bond, a five-year bond, is the first tranche of the $2 billion bond registered by the Federal Government with the Securities and Exchange Commission (SEC).

The bond’s structure allows the government to absorb oversubscriptions within the limit of the programme’s total size of $2 billion.

Market sources said the success of the $500 million bond will open up a new window of capital raising for other tiers of government and companies, with the maiden sovereign bond serving as a benchmark for subsequent issuances.

They pointed to the development of the corporate Eurobonds, Sukuk, non-interest issuance market and the green bond market, which followed the huge success of the Federal Government’s pioneering offers in those markets.     

Sources said the significant oversubscription of the $500 million bond, with a five-year tenor and a coupon of 9.75 per cent per annum, showed that investors were confident Nigeria’s economic reforms would stay the curve.

The Nation had reported in the wake of the opening of the application list two weeks ago that the maiden domestic dollar bond was heading for oversubscription given preliminary book building and general investor appetite.

Experts were unanimous on the historic importance and benefits of the new bond issuance.

Managing Director of Financial Derivatives Company (FDC), Mr. Bismarck Rewane, said at the weekend that the successful issuance of the bond will bring significant benefits to the naira.

“The proceeds from the bond issuance, coupled with the CBN’s reintroduction of the Retail Dutch Auction System, which is expected to hold another auction in September, will stabilise the naira.

“A sustained naira stability will ease price pressures, with inflation slowing throughout the remainder of 2024.

“The slowdown in inflation will be supported by the harvest season, base effects, and an import duty waiver,” Rewane stated.

Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said Nigeria has a strange position of having a significant number of its citizens having huge deposits of dollars in domiciliary accounts earning nothing and not contributing significantly to economic activity.

He said the bond provides a platform for those seemingly idle funds to be invested and get good returns while still enjoying the hedging advantage of holding a reserve currency.

“This instrument also provides the Federal Government the much needed dollar liquidity for the forex market which hopefully will lead to the strengthening of the naira.

“This could ultimately have a positive knock-on effect on inflation and consequently interest rates.

“This is also a positive move for the capital markets as it increases product variety and liquidity within the market,” Amolegbe said.

Managing Director, AIICO Capital, Dr Femi Ademola, said the domestic foreign currency-denominated bond is in fulfilment of the promise by the government to attract funding from Nigerians in the diaspora.

According to him, the bond allows Nigerians to invest their foreign currency in dollars, thus removing the fear of a loss of value due to naira devaluation.

“The success of this issuance will be a confidence boost for the country and the current administration.

“It would also allow the government to channel the remittances into more profitable ventures for investors.

“In terms of impacting the financial market, the effect will be the same as the issuance of Eurobonds.“The instruments would be tradeable in the market thus deepening the market further,” Ademola said.

Managing Director, HighCap Securities, Mr. David Adonri, explained that the domestic dollar bond will enable domiciliary account holders to earn good income on their generally non-interest yielding deposits in Nigerian banks.

He said the bond will reduce capital flight since interest payments will be retained in the local economy.

“Generally, it is an attractive investment outlet for domestic investors who have been yearning for investment in dollar-denominated assets locally. It will deepen the country’s capital market,” Adonri said.

Besides the interest rate of 9.75 per cent per annum, the $500 million bond also qualifies for tax exemption for pension funds and other investors.

It has also been granted liquid assets status by the Central Bank of Nigeria (CBN), implying that banks can use such investments in the calculation of their liquidity ratio (LR).

Trustees and pension fund administrators can also invest in the bond. It is considered as risk-free with the sovereignty and credit of Nigeria as a guarantee.

Also, the Federal Government had entered into an irrevocable commitment that it shall on no account convert or repay the principal amount and interests on the $500 million bond in naira.

According to the Trust Deed for the $500 million bond, the Federal Government pledged an irrevocable commitment that it shall keep fidelity to the nature of the bond as a dollar-based issuance, with both the principal and the coupon to be paid in the currency of issuance.

The Trust Deed is the binding and enforceable legal agreement between the Federal Government and subscribers to the $500 million bond.

Preliminary book-building reports had indicated that there were strong possibilities of a substantial oversubscription, describing the bond as highly attractive.

Market sources had said the pricing was in alignment with the current yield of Nigeria’s Eurobond of equivalent tenor.

Nigeria’s Eurobond of between three and five years currently yield between 9.662 per cent and 10.03 per cent, thus the mid-point pricing of 9.75 per cent is considered attractive.

The bond has the potential to attract a large number of foreign investors, according to most analysts.

“For foreign investors, the price is attractive when compared to yield in the United States, Germany, Japan and the United Kingdom.

“The risk premium for Nigeria’s sovereign risk is adequate,” a senior investment banker had said.

Sources had said there was notable enthusiasm for the first sovereign dollar-denominated domestic bond, with interests cutting across domestic institutional and individual investors, portfolio funds and the Diaspora community.

“I think it’s possible if you look at the universe of potential investors that will be eligible to participate. There is a report that says the dollars held in domiciliary accounts in Nigerian banks are in excess of $20 billion. This represents potential investors.

“There are also lot of very active foreign-currency-denominated mutual funds that are also potential investors.

“There are also Nigerians in the diaspora who are currently earning less than nothing on their investments that will find investing in this dollar bond quite attractive in terms of returns.

“The foreign portfolio investors are also not precluded from investing, and this should also boost patronage.

“So, the chance of an oversubscription is possible,” said a senior investment banker with a speciality in debt issuances.

Another source said the emerging macroeconomic outlook is encouraging to investors, who may seek the opportunity of the dollar issuance to lock in value.

The government had ring-fenced the bond against money laundering and illicit flows by stipulating stringent subscription rules.

Under the guidelines, all corporate or institutional investors are required to provide information on country where the entity is incorporated as well as residency classification, while such corporate application must bear the corporate body’s seal and be signed in accordance with the company’s signature mandate by duly authorised officials.

Pension or provident funds are required to ensure that applications are in line with the guidelines of the National Pension Commission (Pencom) on custody of pension assets.

Individual applicants are required to provide evidence of full payment for the amount applied, full name, Biometric Verification Number (BVN) number, residency classification and regular signature.

Application from a group of individuals should be made in the names of those individuals with no mention of the name of the group.

An application by an illiterate person should bear his or her right thumbprint on the subscription form and be witnessed by an official of the issuing house at which the application is lodged, who must first have explained the meaning and effect of the application to the illiterate person in his or her own language. The witness should indicate his or her name and signature also on the form.

Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, while unveiling the $500 million bond in Lagos, said it was a bold step towards economic transformation as it would further attract both local and international investors.

He explained that the bond issuance would further expand the Nigerian financial system while providing the country the opportunity to tap the huge resources of its Diaspora community.

According to him, with the bond issuance, Nigeria will be able to access foreign currency held by Nigerians abroad, as well as other international investors who believe in the macroeconomic reform initiatives spearheaded by the Tinubu Administration.

https://thenationonlineng.net/investors-take-fgn-500m-bond-to-oversubscription/