Investors affirm confidence in Nigeria's economy

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By Terfa Tilley-Gyado and Stanley Oronsaye

Last Friday, Nigeria made a successful debut at the international bond market with the 10 year $500 million Eurobond massive subscription. The issue was 2.5 times oversubscribed, translating to about $1.25 billion. This is coming after initial apprehension about the attractiveness of the bond on the back of mismanagement of huge income from oil over the last one year.

In an interview before the deal closed that day, the finance minister, Olusegun Aganga, said that he had spoken with over 40 investors and the response to the bond had been overwhelmingly assuring. Mr. Aganga dismissed reports that some investors had doubts about the viability of the issue. The report suggested that the alleged mismanagement of Nigeria's Excess Crude Account (ECA) had caused potential investors to shun the country's first bond issue.

Mr. Aganga, who was in New York as part of the road show to market the bond, said that the Excess Crude Account barely featured in the questions the investors were asking. "There is absolutely no correlation between the Excess Crude Account and what we have set out to achieve with the bond," he said. "In reality, 42 per cent of that goes into investment in power such as the NIPP project which has been allocated N8 billion."

Excess Crude Account

He said that the Excesss Crude Account was a necessity for states to invest in major capital projects but refused to comment on allegations that many states had not remitted the money accordingly.

"The investors were far more interested in economic and other fiscal factors. They were fairly consistent in their questions which were mostly about political stability, exchange rates, the budget, levels of production and the quality of our loan book."

He said that modern investors were extremely sophisticated and Nigeria represented a very attractive opportunity for those looking for healthy diversity in their portfolios.

The finance minister added that a large number showed interest in the Euro Bond.

"However it is not just anybody with money that will be able to invest. We need to vet each investor's suitability as well."

A highly elated Aganga, after the close of the book, said the issue was a major milestone for Nigeria. "More remarkable is the exceptional quality and diversity of investors from 18 countries spanning Europe, the US, Asia and Africa.

Investors are impressed by Nigeria's credit story and were very keen to participate in the offering."

Mr Aganga said Nigerian corporate can now more easily access well-priced long term financing from the international capital markets to fund economic opportunities such as infrastructural development.

"We now have a transparent and internationally observable benchmark against which international investors can accurately price risk. My expectation is for an increase in capital inflows and FDI (foreign direct investment) into the economy."

The accomplishment of the bond may not necessarily translate to much unless local corporate are able to latch on to the success recorded.

"We will commence the process of educating Nigerians on the benefits of this bond. It is a very good thing," the minister said in a text message.

William Wallace, the Africa Editor of the Financial Times said the massive investor interest in Africa has rubbed-off well on Nigeria.

"Some of the world's fastest growing economies are on the continent, which looks set to grow in coming years at double or more what the developed world is. Then there is a lack of supply of African sovereign debt. Nigeria as the second largest economy is obviously going to attract interest."

Fiscal prudence

Mr. Wallace said current mismanagement may be due to the elections and that fiscal prudence will improve after April. "Nigeria's debt profile is still far more favourable than it was a few years ago even if both domestic and external debt has been on the rise again."

Standard & Poor's Ratings Services on Tuesday assigned its ‘B+' long-term senior unsecured debt rating to the bond. At the same time, S&P assigned a recovery rating of ‘4' to the proposed bond, indicating its expectation of average (30 per cent to 50 per cent) recovery in the event of a payment default.

According to S&P, the ratings are also constrained by a low level of development and high dependence on the oil sector.

"Furthermore, we see residual risks in Nigeria's financial sector, although the Central Bank has addressed solvency and liquidity problems in the banking sector," it said.

S&P notes that even with mismanagement, Nigeria's oil revenues are such, with the price of oil rising, that over the 10 year period the country will always be able to pay.