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FX Scarcity Heightens Concern over Banks’ Eurobond Obligations

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The broad effects of low oil prices and production disruptions, which have resulted in a significant reduction of foreign exchange earnings, have raised concerns about some banks’ ability to honour their Eurobond obligations upon maturity.

Some of the offshore funds that were raised by the banks to expand operations and finance foreign currency infrastructure projects would mature between 2017 and 2021.

For instance, Access Bank will have to raise $350 million for its maturing Eurobond due in July 2017; Fidelity Bank’s $300 million Eurobond would be due by May 2018; Guaranty Trust Bank’s $400 million will be due in May 2018; Zenith Bank has an outstanding debt obligation of $500 million; Diamond Bank also has a $200 million Eurobond; while First Bank of Nigeria Ltd has two Eurobonds – $300 million and $400 million – maturing in 2020 and 2021.

All the Eurobonds issued by the banks with different coupon rates that must be paid annually before maturity, are also callable before maturity.

Afrinvest West Africa Limited highlighted this in its 2016 “Nigerian Banking Sector Report” launched last week.

The high cost of raising capital from the domestic market was one of the factors that drove the banks and other corporates to the international debt market.

The Nigerian economy is in recession with external reserves falling to $24.743 billion as of last Thursday. Since the Central Bank of Nigeria (CBN) introduced a flexible exchange rate regime to allow the currency to trade freely on the interbank forex market, dollar liquidity has remained a challenge.

Owing to this, the central bank has remained the major supplier of FX in the market. The naira closed at N440 to the dollar on the parallel market last Friday, while on the interbank FX market the spot rate of the naira closed at N307.79 to the dollar.

“With the scarcity of FX in the market, you shouldn’t forget that a number of banks have Eurobond exposure. There are more than $2 billion maturing Eurobond obligations within the next few years. If we don’t find ways to allow more dollars into the system, this could be a potential problem to watch out for as they mature,” the Managing Director of Lagos-based Afrinvest West Africa Limited Ike Chioke said in the report.

Furthermore, the report stated that oil and gas loans may also pose a challenge for Nigerian banks in 2016, based on developments in the economy, followed by general consumer goods and then manufacturing.

“Power is a perennial one since the power sector privatisation. That is because we have many of these assets which only earn naira revenue, but were sold in dollars.

“So, many banks still have many challenges restructuring those facilities because of the massive devaluation and the effect on the balance sheet,” Chioke added.
However, the report showed that the Nigerian banking industry remained liquid, with many of the commercial banks reporting very strong liquidity ratios based on their 2015 audited accounts.

From a valuation perspective, the report stated that all the issues facing the economy had turned out to be challenging for the banks, adding that they are relatively undervalued compared to sub-Saharan African banks from a price-to-earnings perspective.

According to the report, from the composition of risk assets, banks’ 2015 audited results showed that an average of about 35 per cent among the Tier I banks, their risk assets were denominated in foreign currency.

“As you translate this on to the balance sheet, because of the exchange rate devaluation, it would have an impact on their capital adequacy ratios. We are projecting NPLs could get to 12 per cent by the end of the year. Clearly, there are lots of concerns for the industry,” the Afrinvest boss said.

He noted that the drop in crude oil prices exposed the underbelly of the Nigerian economy, adding that immediately the oil tap stopped flowing, everybody in Abuja began to pay attention to words such as reforms and economic restructuring.

“This also affected the country’s current account balance such that quarter-on-quarter, the country was in deficit, trying to find ways to fund the perennial appetite of its citizens importing basically everything it needs, from toothpicks, ice cream, human hair, etc.

“But there were other shocks that we caused ourselves. Knowing that our income had declined, we didn’t take appropriate defensive action to correct the dwindling of our external reserves. It took us until May 2016, to actually effect a proper devaluation of the currency and by that time, we had lost close to half of our external reserves.

“So, that was a self-induced problem and we could have addressed that. That delay in devaluation was really not a good one for the economy.

“Well, we did manage to reform the fuel pricing even though it was a bit late and the current structure is still unstable. We have managed to divert a portion of export proceeds that come from the international oil to fund the oil marketers who then import fuel for us.

“But going full and implementing something that allows us to build our refineries and be able to have petroleum products locally would save us between 30 and 40 per cent of the FX we spend in importing fuel.

“Another shock was the Treasury Single Account (TSA) implementation. In an environment where you know your income is much reduced and you are trying to deficit finance yourself, you are mopping up the liquidity in the banking system.

“You find out that liquidity is a bigger driver in the system than interest rate. So, by mopping up all the liquidity in a very tough market, you actually frustrate many of the banks from lending.

“Today, the fundamentals of the country are not as strong as they used to be, and we can see that from our ratings downgrade. This obviously doesn’t help us when we want to go abroad to raise capital to fund our deficit as we plan to do this year,” the report said.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Markets

SEC To Ban Unregistered CMOs From Operating By Month End

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The Securities and Exchange Commission (SEC) says it will stop operations of Capital Market Operators (CMOs) that are yet to renew their registration on May 31, 2021.

This was contained in a circular signed by the management of SEC in Abuja on Monday.

On March 23, SEC had informed the general public and CMOs on the reintroduction of the periodic renewal of registration by operators.

The commission noted that the reintroduction of the registration renewal was due to the need to have a reliable data bank of all the CMOs registered and active in the country’s capital market.

“To provide updated information on operators in the Nigerian Capital Market for reference and other official purposes by local and foreign investors, other regulatory agencies and the general public, to increasingly reduce incidences of unethical practices by CMOs such as may affect investors’ confidence and impact negatively on the Nigerian Capital Market and to strengthen supervision and monitoring of CMOs by the Commission,” SEC explained.

According to the circular, the commission said CMOs yet to renew their registration at the expiration of late filing on May 31, would not be eligible to operate in the capital market.

It explained that CMOs were required to have completed the renewal process on or before April 30, however, the commission said late filing for renewal of registration would only be entertained from May 1 to May 31.

SEC also said that asides from barring the CMOs who failed to comply accordingly, their names would be published on its website and national dailies.

It added that names of eligible CMOs would be communicated to the relevant securities exchanges and trade associations.

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A Threat to Revenue As Nigeria’s Largest Importer of Crude, India slash Imports By $39.5B

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Nigeria’s revenue earning capacity has come under threat following the reduction of importation of crude oil by India.

India, Nigeria’s largest crude oil importer, reduced crude oil imports by $39.5bn in April, compared to the same time the previous year, data from India’s Petroleum Planning & Analysis Cell showed.

According to the Indian High Commission in Nigeria, India’s crude oil imports from Nigeria in 2020 amounted to $10.03bn.

This represented 17 percent of Nigeria’s total crude exports for the year according to the Nigerian National Petroleum Corporation, as quoted by OilPrice.com.

As Nigeria’s largest importer of crude oil, lockdowns in India’s major cities from the COVID-19 surge in April had ripple effects on Nigeria’s oil sales.

The NNPC was prompted to drop the official standard price of its main export streams, Bonny Light, Brass River, Erha, and Qua Iboe, by 61-62 cents per barrel below its April 2021 prices. They traded at $0.9, $0.8, $0.65, $0.97 per barrel respectively, below dated Brent, the international benchmark, as Oilprice.com showed.

India had been buying the not-too-light and not-too-heavy Nigerian crudes that suited its refiners.

Reuters reported that the Indian Oil Corporation’s owned refineries were operating at 95 percent capacity in April, down from 100 percent at the same time the previous month.

An official at the IOC was quoted as saying, “If cases continue to rise and curbs are intensified, we may see cuts in refinery runs and lower demand after a month.” Hundreds of seafarers risked being stuck at sea beyond the expiry of their contracts, a large independent crude ship owner reportedly told Bloomberg.

India reportedly bought more American and Canadian oil at the expense of Africa and the Middle East, reducing purchases from members of the Organisation of the Petroleum Exporting Countries to around 2.86 million barrels per day.

This squeezed the group’s share of imports to 72 percent from around 80 percent previously, as India’s refiners were diversifying purchases to boost margins, according to Reuters.

India also plans to increase local crude oil production and reduce import expenses as its population swells, according to Bloomberg.

A deregulation plan by the Narendra Modi-led government to boost national production to 40 million tonnes of crude oil by 2023/2024, an increase of almost eight million tonnes, had already been initiated.

According to Business Today, an Indian paper, the country currently imports 82 percent of its oil needs, which amounted to $87bn in 2019.

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Energy

Invest Africa and DLA Piper Partner to Support ESG Best Practice in African Renewable Energy Projects

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The global law firm, DLA Piper, has partnered with Invest Africa, the leading trade and investment platform for African markets, to support the development of ESG best practice in African renewable energy projects.

Clear Environmental, Social and Governance (ESG) targets and measurements have become an increasingly important part of fundraising as investors seek to align their portfolios with sustainable growth. For a continent boasting ample natural resources, this presents a significant opportunity for Africa’s green energy sector. However, renewable does not always equal sustainable and developing and articulating ESG metrics can pose a significant challenge to projects as they prepare investment rounds.

The project will assemble experts from the worlds of impact investment, development finance and law. Across a series of online meetings, participants will discuss strategies to improve ESG practices in African renewable projects from both a fundraising and operational perspective.

Amongst those speaking in the inaugural session on Thursday 13th May are Cathy Oxby, Chief Commercial Officer, Africa GreencoDr. Valeria Biurrun-Zaumm, Senior Investment Manager, DEGOrli Arav, Managing Director – Facility For Energy Inclusion (FEI) – Lion’s Head Global PartnersBeatrice Nyabira, Partner, DLA Piper Africa, Kenya (IKM Advocates) and Natasha Luther-Jones, Partner, Global Co-Chair of Energy and Natural Resources, International Co-Head, Sustainability and ESG, DLA Piper.

Veronica Bolton-Smith, COO of Invest Africa said, “Africa is particularly vulnerable to the impact of climate change despite contributing very little to global emissions. As the price of renewables fall, they will form an ever more important part of Africa’s electrification. In this context, it is essential that projects be given the tools to apply best practice in ESG not only from an environmental perspective but also in terms of good governance, fair working conditions and contribution to social inclusion. I look forward to working closely with DLA Piper on this important topic.”

Natasha Luther-Jones, Global Co-Chair Energy and Natural Resources and International Co-Head Sustainability and ESG at DLA Piper also commented, “Climate change is one of the biggest challenges companies, and people, face today and when we look at its reduction – whether that be in how we power our devices, what we eat or how we dress, where we live or how we work – all roads come back to the need to increase the amount of accessible, and affordable, clean energy. However, renewable energy companies are not automatically sustainable as sustainability is a focus on all ESG factors, not just environmental. We know the need for renewable energy is only going to continue to rise, and therefore so will the number and size of renewable energy companies. The additional challenge is to make sure they are truly sustainable organisations and that’s what we’re excited about discussing during the webinar.”

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