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A Challenging Bond Auction for the DMO – Coronation Merchant Bank

The DMO held its monthly auction of FGN bonds yesterday. It offered N225bn but raised N200.9bn (USD466.5m) through re-openings of the 2025, 2032 and 2042 FGN bonds.

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Bonds- Investors King

The DMO held its monthly auction of FGN bonds yesterday. It offered N225bn but raised N200.9bn (USD466.5m) through re-openings of the 2025, 2032 and 2042 FGN bonds.

The participation level was higher when compared to the auction held in July. However, total subscriptions remained lower when compared with the average of the first six months of 2022. The DMO secured a total bid of N247.1bn (USD574.6m) at the bond auction held yesterday.

The bids for the 3, 10 and 20-year benchmarks were allotted at the marginal rates of 12.5% (previously; 11.0%), 13.5% (previously; 13.0%) and 14.0% (previously; 13.7%) respectively.

The relatively low demand at the auction mirrors tight system liquidity. We note that market liquidity stood at a deficit of -N3.6bn on Friday (12 August ‘22). Overnight and repo rates closed within a range of 12 – 15%. The tightness in system liquidity can be partly attributed to CBN’s continuous use of the discretionary cash reserve ratio (CRR) debits.

We suspect that the negative real interest rates given the elevated inflation figure has contributed to investors’ apathy towards FGN bond yields. The latest inflation report released by the NBS shows July’s headline inflation increased by 104bps (when compared with the previous month) to 19.64% y/y. This is the highest reading since 2005.

Meanwhile, average yield in the secondary market for FGN bonds is 12.7% (as at 16 August ’22). The CBN’s in-house estimates suggest that inflation is likely to remain considerably high, partly due to the build-up of increased spending related to the 2023 general elections.

The monetary policy committee (MPC) believes that further tightening would help moderate worsening inflationary trend and narrow the real interest rate gap. The MPC/CBN raised the policy rate by 100bps from 13% to 14% in July ‘22. However, given the upward trend in inflation, expectations of another rate hike is not far-fetched.

The DMO had set out to raise a maximum of N1.9trn by end -Q3 ’22. However, year-todate, it has raised N2.1trn. exceeding its target by 12% or N220bn. Given that the debt management office is expected to offer instruments worth N221 – 240bn through reopenings of the 13.53% FGN MAR 2025, 12.50% FGN APR 2032 and 13.00% FGN JAN 2042 bonds in September, the DMO is likely to exceed its borrowing target for FGN bonds by end -Q3 ’22.

Allowing for the smaller amounts which the FGN raises from the sale of other debt instruments such as NTBs and savings bonds, DMO is on track pro rata to meet or exceed the domestic borrowing target for the year set at N3.53trn.

The FGN was unable to meet its revenue target for Jan – Apr 2022, it underperformed by 51%. FGN’s retained revenue stood at N1.63trn, compared to the prorate target of N3.32trn. Debt service (N1.94trn) accounted for 119% of the FGN’s revenue in April ‘22.

In the near term, we expect increased borrowing (via FGN bonds) to result in an uptick in yields across the curve. We see mid-curve FGN bond yields around 12.0 – 13.5% and yields at the longer-end of the curve between 13.25% – 14.25% 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.

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

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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Bonds

Sub-optimal Demand at DMO’s Latest Bond Auction

Demand was considerably lower, as the DMO secured a total bid of N142.3bn (USD331.6m)

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Bonds- Investors King

The DMO held its monthly auction of FGN bonds on Monday. It offered N225bn but raised N123.9bn (USD288.7m) through re-openings of the 2025, 2032 and 2042 FGN bonds.

Demand was considerably lower, as the DMO secured a total bid of N142.3bn (USD331.6m). The bids for the 3, 10 and 20-year benchmarks were allotted at the marginal rates of 11.0% (previously; 10.1%), 13.0% (previously; 12.5%) and 13.7% (previously; 13.2%) respectively. The DMO has a domestic funding target of N3.53trn to finance the projected deficit of N7.35trn in the FGN’s 2022 budget.

The relatively lower demand at the auction is reflective of tight system liquidity which can be partly attributed to CBN’s continuous use of the discretionary Cash Reserve Ratio (CRR) debits.

According to the MPC/CBN, the use of discretionary CRR debits are vital in controlling excess liquidity. We note that system liquidity stood at -N169.5bn as at 18 July ‘22.

Investors’ apathy towards the current level of FGN bond yields is another reason for weaker demand. The domestic fixed income market is currently dominated by local investors and real interest rates have remained negative. The headline inflation stood at 18.60% y/y in June ‘22. This is the highest headline inflation rate since January ‘17.

At its latest meeting held yesterday, the monetary policy committee raised the monetary policy rate (MPR) from 13% to 14%. The committee expects this additional tightening to assist with moderating rising inflation and narrow the real interest rate gap.

For Q3, the DMO plans to raise between N630bn – N720bn through FGN bonds. The debt management office had set out to raise between N1.7trn – N1.9trn by end-Q3 ’22.

However, year-to-date, it has raised N1.9trn. Therefore, the DMO is likely to exceed its borrowing target for FGN bonds by end -Q3 ’22. Allowing for the smaller amounts which 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.

In the secondary market for FGN bonds, YTD the average yield has declined by 8bps. In the near term, we expect yields to trend upward on the back of increased supply by the FGN. On a separate note, the international debt market is now more expensive for emerging economies like Nigeria amid monetary policy tightening by advanced economies.

We see mid-curve FGN bond yields around 11.5% – 12.7% and yields at the longer-end of the curve between 12.5% – 13.7% over the next one month. However, the level of liquidity (influenced by items such as auctions, CRR debits/refunds, bond/NTB maturities, coupon payments and FAAC allocation) would also impact the movement in yields.

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Bonds

MTN Nigeria Seeks Approval to Raise N200 Billion for Network Expansion

MTN Nigeria, Africa’s leading telecommunication company, is seeking approval from the Securities and Exchange Commission to raise another N200 billion via bond issuance for network expansion.

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MTN

MTN Nigeria, Africa’s leading telecommunication company, is seeking approval from the Securities and Exchange Commission to raise another N200 billion via bond issuance for network expansion.

The telecom giant disclosed this in a statement signed by Uto Ukpanah, Company Secretary, MTN Nigeria, and obtained by Investors King.

According to the statement, this is a follow-up to the N200 billion debut bond issued in 2021 under the company’s N110 billion 13% 7-year series I bonds due 2028 and N90 billion 12.75% 10-year series II bonds due 2031.

MTN Nigeria plans to use the proceeds of the bond issuance for capital expenditure such as network expansion, working capital management, and general corporate purpose.

“The company will decide on issuances under the Second Bond Issuance Programme in due course subject to prevailing market conditions and obtaining relevant regulatory approvals,” the company added.

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