African credits take hit in Eurobond market amid global pressures
The current inflationary pressures are causing prices of fixed income securities to plummet in the international capital market and the impact is more pronounced on African Eurobonds which have seen their prices fall significantly, resulting in spike in yields on debt notes.
It is global, analysts say, pointing at German’s 10-year bond which hit one per cent for the first time in several years. UK’s 10-year bond also hit two per cent for the first time in years, just as the US 10-year bond hit three per cent for the first time since 2018.
From Ghana to Nigeria and Kenya, prices of both sovereign and corporate Eurobonds have tumbled, with the resultant rise in yields, as new investors demand higher levels of compensation to hold the papers which many existing investors seem to be dumping as the yield on liquid G7 notes rise to new historic high levels.
Some of these pressures have come from the Russia-Ukraine tension and concerns around global interest rate hikes caused by inflationary pressures across most developed and developing countries.
On Tuesday, May 3, 2022, it was a “bloody” day for most of Africa’s securities as their prices tumbled, a continuation of the trend from last Friday. Out of Nigeria’s 14 Eurobonds listed, within maturities stretching from this year to 2051, as many as 11 of the notes saw their prices fall, with yields spiking higher, even so prices on three of the maturities were unchanged.
The country’s bond due in 2049 with a coupon of 9.248 per cent fell 1.75 to an offer price of 82.75 and a yield of 11.30 per cent, a doubledigit historic high level which raises concerns about the premium the Nigerian government would have to pay if it were to go back into the Eurobond market at this time.
All of Ghana’s 14 bonds ended the day in red, with prices headed southwards and yields climbing new highs. Ghana’s 8.125 per cent bond due on January 18, 2026, for instance, fell 1.875, with an offer price of 77.125 and a corresponding offer yield-tomaturity of 19.61 per cent. At that price and given the fundamentals of the issuing country, that is the yield at which the holders of the bond would be willing to sell it off. Similarly, Ghana’s 8.75 per cent bond due in 2061, fell 1.25 to an offer price of $55.875 and a spike in offer yield-tomaturity to 15.25 per cent.
It was largely the same for Kenya, East Africa’s biggest economy. Its bond due on February 28, 2028, with a coupon of 7.25 per cent fell 1.25 to an offer price of 88 and a spike in offer yield-to-maturity of 10.02 per cent. In the same way, the note due on February 22, 2032, with a coupon of eight per cent fell 1.625 to an offer price of 85.625 and an offer yield-tomaturity of 10.50 per cent.
Nigeria’s offerings have also had their share of the pressure. The country’s 2029 Eurobond issued in March at a coupon of 8.375 per cent fell 1.25 to an offer price of 92.75 and an offer yield of 10.11 per cent.
Similarly, the country’s 2051 Eurobond issued in September, 2021, at an 8.25 per cent coupon has seen its price drop from 100 to 74.625, leaving investors with a 25.375 per cent capital loss in only seven months.
It is the same scenario across the other emerging markets, says Abiola Rasaq, a Lagos-based financial analyst, who noted that yields on many African sovereign notes had risen to double digits on the long end of the curve.
While African sovereign bonds need to reassess their respective fiscal capacities to take on additional external debts at current debt service burdens and debt ratios, there is also the need to reassess the fundamentals of the economy and better position them for credit at better terms. The risk of African markets is real and varied, but certainly often over-bloated and that makes it unduly expensive and punitive for African issuers, corporate and Sovereigns inclusive, said Abiola Rasaq.
Current
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conditions, especially pricing, make it unduly expensive for countries like Nigeria to tap the market as it means the government would have to pay double digits interest rate for any issue of 10 years and above. That is expensive for a dollarised borrowing and that somewhat shuts the door for African corporates which credits would be priced on the back of the sovereign yield curve. The credit spread is certainly in excess of the risk and perhaps a good starting point for African sovereigns to effectively engage rating agencies to ensure the country gets deserved credit ratings, Abiola Rasaq noted.
These facts call for policy reassessments by the monetary and fiscal authorities in the countries, says another analyst. She notes that in the case of Nigeria for instance, there are maturities every year from 2027 to 2033. This implies that the government, which is mulling a return to the market soon, is likely to consistently tap the market annually over the next few years. Analysts expect that a likely 12-year bond issue in the near term will cost the Nigerian government around 11 per cent due to the new issue premium.
On the global scene, the Federal Open Market Committee in the United States is expected to meet today, Wednesday, May 4, 2022, and is expected to hike benchmark rates, perhaps between 25 basis points and 50 basis points. That move is also expected to calm the markets a bit for now, observers note.
There are also expectations that the Bank of England will raise rates again later in the week. Already, the Australian central bank raised rates earlier this week by 25 basis points to 0.35 per cent in a hawkish move for the first time in about 11 years.
Where does this leave the Central Bank of Nigeria? Nigeria’s Monetary Policy Rate currently stands at 11.5 per cent, against an inflation rate of 15.92 per cent. Some analysts expect the Monetary Policy Committee to raise its rate when next it meets in about three weeks. Will this happen? It’s only a question of time.