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Another Decent Bond Auction for the DMO – Coronation Merchant

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The DMO held its monthly auction of FGN bonds on Monday last week. It offered N225bn but raised N226.1bn (USD536.5m) through re-openings of the 2025, 2032 and 2042 FGN bonds.  Demand was considerably higher, as the DMO secured a total bid of N552.4bn.

The successful bids for the 3, 10 and 20-year benchmarks were allotted at the marginal rates of 10.1% (previously; 10.0%), 12.5% (unchanged) and 13.2% (previously; 13.0%) respectively from the auction conducted in May ‘22.

Coronation Merchant analysts observed that the DMO has a domestic funding target of N3.53trn and an external funding target of N2.56trn. This is to finance the projected deficit of N7.35trn in the FGN’s 2022 budget.

Based on the DMO’s bond issuance calendars, the debt management office set out to raise a total volume of between N1.1trn – N1.2trn in H1 ‘22. However, the DMO has raised N1.8trn at its bond auctions which include non-competitive sales to public agencies.

Allowing for the smaller amounts the FGN raises from the sale of other debt instruments such as NTBs and savings bonds, it is on track pro rata to meet the domestic borrowing target for the year.

On external borrowing, in March ’22, the DMO raised USD1.25bn (N526.8bn) through Eurobonds. However, In May ‘22, the finance minister stated that Nigeria is unlikely to borrow from the international capital market in the near-term. This is as a result of worsening external financing conditions as advanced economies tighten their monetary
policies to combat rising inflation.

Coronation Merchant notes that the average yield in the Eurobond market for sovereigns under our coverage has increased to 12.9% (as at 30 June ’22 ) from 7.2% at end-2021. Therefore, Coronation Merchant expects increased borrowings in the domestic debt market. However, the DMO’s bond issuance calendar for Q3 ’22 is yet to be published.

FGN bonds represented 70.7% of total FGN domestic debt as at end-March ’22, compared with 72% at end- December ‘21. It is worth highlighting that investors also have access to alternative fixed-income instruments such as corporate bonds and commercial papers.

According to the FMDQ, as at 30 June ’22, the collective market capitlisation of these instruments stood at N1.5trn.

Nigeria’s domestic fixed income market has been dominated by local investors since the peak of the pandemic in 2020. The participation of foreign portfolio investors in recent auctions has been minimal.

The latest monthly report by National Pension Commission (PENCOM) show that as at end-May ’22, FGN bonds held by pension fund administrators had increased by 3% m/m and 10.4% y/y to N8.5trn.

The PENCOM report shows that FGN bonds accounted for 59.7% of total assets under management, compared with 61.5% recorded in the corresponding period of 2021.

Although, the long-tenure nature of FGN bonds (with maturities of up to 50 years) contributes to the attractiveness of this asset class. YTD average yield in the secondary market for FGN bonds has declined by 37bps.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Bonds

Ecobank Redeems 5-year US$400 Million Convertible Debt

Ecobank Transnational Incorporated (ETI) has redeemed its 5-year US$400 million debt issued in 2017 to all holders, the bank said in a regulatory filing released on Tuesday.

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Ecobank Transnational Incorporated (ETI) has redeemed its 5-year US$400 million debt issued in 2017 to all holders, the bank said in a regulatory filing released on Tuesday.

The Lomé-based parent company of the Ecobank Group, announces today that it has repaid upon maturity the 5-year US$400 million convertible debt issued in September and October 2017.

According to the bank, the holders of the convertible debt did not exercise their option to convert their holdings into ordinary shares during the conversion period of 19 October 2019 to 13 October 2022.

As a result, ETI redeemed the debt at 110% of the principal amount, in line with the terms of the convertible debt agreements.

In addition, the repayment did not affect ETI’s regulatory capital since the debt had been fully amortised for capital in 2021.

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Bonds

Debt Management Office Offers Two FG Savings Bonds for October

The Debt Management Office (DMO) has declared opened two Federal Government Savings Bond Offers for October 2022.

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The Debt Management Office (DMO) has declared opened two Federal Government Savings Bond Offers for October 2022.

In a statement released by the DMO on Tuesday, Federal Government is offering a 2-Year FGN Savings Bond due October 12, 2024 at 11.382% per annum interest rate and 3-Year FGN Savings Bond due October 12, 2025 at 12.382% per annum interest rate.

The opening date for subscription was set as today, October 4, 2022 and the closing date was three days after, October 7, 2022.

According to DMO, the settlement would be done on October 12, 2022 while coupon payment dates are January 12, April 12, July 12, and October 12.

Unit of Sale was set at N1,000 per unit subject to a minimum subscription of N5,000 and in multiples of N1,000 thereafter, subject to a maximum subscription of N50,000,000.

Meanwhile, the Director-General of DMO, Patience Oniha DMO, during a presentation at an executive course on budgeting and fiscal responsibility organised by the Fiscal Responsibility Commission in Abuja, has said the federal government cut down on borrowings by increasing revenue generation and improve on expenditure.

In her paper titled “Debt Sustainability Challenges and Strategic Revenue Mobilisation Initiative”, Oniha explained that because the federal government had run deficit budgets for many decades, borrowings from external and domestic sources are unavoidable.

She said: “A budget may be surplus, balanced or deficit. Nigeria has run deficit budgets on a consecutive basis for decades.

“The financing of the deficits through borrowing from local and external sources is the principal reason for the growth in debt stock and debt servicing.

“One way to reduce budget deficits is to grow revenues; the other way is to prioritise expenditure and cut waste and leakages.”

 

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Bonds

A Satisfactory Bond Auction for the DMO

DMO offered N225bn but raised N229.2bn through re-openings of the 2025, 2032 and 2037 FGN bonds

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Director General DMO - Investors King

The DMO held its monthly auction of FGN bonds on Monday (19 September ’22). It offered N225bn but raised N229.2bn (competitive allotment only) through re-openings of the 2025, 2032 and 2037 FGN bonds. The participation level was slightly lower when compared to the auction held in August.

The bid-to-cover ratio for September stood at 1.1x compared to 1.2x in August. The DMO secured a total bid of N246.4bn (USD564m) at the auction. The bids for the 3, 10 and 15-year benchmarks were allotted at the marginal rates of 13.5% (previously; 12.5%), 13.8% (previously; 13.5%) and 14.5% respectively.

The demand at this auction is partly driven by expected inflows of N166bn in coupon payments later this month as well as, improved system liquidity primarily driven by inflows of N185.8bn in FGN bond coupon payments in the first three weeks of September.

Coronation Merchant Bank’s economic research team note that market liquidity stood at a surplus of N28.3bn on Monday (20 September ‘22). Overnight and repo rates closed within a range of 9 – 11%.

The DMO had set out to raise N1.8trn through FGN bonds by end-Q3 ’22. However, yearto-date, it has raised N2.3trn, exceeding its target by 15% or N268bn. Considering the sale of other debt instruments such as NTBs and savings bonds, the DMO is on track pro rata to meet or exceed its domestic borrowing target (N3.53trn) for the year.

According to the DMO’s latest public debt report, total domestic debt increased by 5% q/q and 20.6% y/y to N26.2trn as at Q2. The increase can be partly attributed to increases in FGN bonds (6.7% q/q), NTBs (2.2% q/q) and FGN Savings bond (15.2% q/q).

FGN bonds accounted for 72.5% of total domestic borrowings in Q2. We maintain our view that the FGN is likely to depend on domestic borrowing to meet its fiscal deficit due to unfavourable external conditions.

Coronation Merchant Bank’s economic research team see mid-curve FGN bond yields around 13.0 – 14.0% and yields at the longer-end of the curve between 14.0% – 15.0% over the next one month. However, the level of system liquidity (impacted by items such as auctions, CRR debits/refunds, bond/NTB maturities, coupon payments and FAAC allocation) would also influence movement in yields.

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