FX Scarcity Heightens Concern over Banks’ Eurobond Obligations

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.