Banks’ early Eurobond redemption signals naira devaluation close

A number of analysts in the Nigerian financial markets were all of last week suggesting that the growing trend of banks redeeming their Eurobonds earlier than their maturity dates could be as a result of growing fears of a near-to-medium term naira devaluation.

The Nigeria Eurobond market has been experiencing a bullish trend in the last couple of weeks owing to improved interest in emerging market assets as a result of attractive yields compared to that of the U.S. and other European economies.

Specifically, the U.S. yield curve for the 2, 5 and 10 years bond had seen inversion more than three times in the last 4–5 weeks as a result of the twist and turn in the trade war with China.

This development has made Nigeria Eurobond assets attractive to diaspora investors who want to quickly take advantage of the high yield as against the volatile yield in the U.S.

However, the narrative in the Nigerian corporates Eurobond space has taken a new turn in 2019. This is as corporates, specifically banks, redeemed $1.1 billion worth of outstanding Eurobond notes before maturity so far in 2019.

Aside from Zenith Bank’s $500.0 million and Diamond Bank’s $200.0 million 2019 notes, which were held to maturity and redeemed as at when due in April and May 2019 respectively, we have seen that Access Bank $400.0 million, First Bank (FBN) $450.0 million, and Ecobank $250.0 million have all successfully recalled their outstanding notes in June, July, and August respectively, said one analysts’ team.

Notably, Zenith Bank recently announced plans to re-call its outstanding 2022-dollar notes, worth $500.0 million, by 16th of September 2019, to bring the total value of early redemptions in 2019 to a whopping $1.6 billion. This raises the question as to why banks are exercising the call option on their dollar notes early.

According to analysts at United Capital, banks are anticipating a devaluation of the naira to be around 2020, and with most Eurobond maturities scheduled for 2021 and 2022, early redemption is only wise.

United Capital said, “Based on our evaluation, we have noticed that more than the allure of calling outstanding issues and reissuing at lower interest rates, early redemptions could be more tilted to the fears of an imminent currency adjustment that could increase obligations of these banks in domestic currency. Again, with maturities of most of these Eurobonds scheduled for 2021-2022, the banks are likely pricing the next devaluation to happen any time from 2020.”

However, Asimiyu Damilare of GTI Research suggested that the Eurobond market in Nigeria has been on a bullish run and this has been driven by the attractive yield on Nigeria’s asset at a time yield curve continues to invert in advance economies like that of the U.S.

Damilare added that the early redemption from banks was simply the banks taking advantage of the cheap interest rate environment in the U.S. to repay their debt obligation before yield environment in the U.S. normalized properly.

He said, “The drivers of the bullish trend in Eurobond market remain the attractive yield on Nigeria’s asset at a time yield curve continues to invert in advance economies like that of the U.S.

“The Nigerian banks mentioned are quickly taking advantage of the cheap interest rate environment in the U.S. to repay their debt obligation before yield environment in the U.S. normalized properly. For instance, the unattractive yield environment in the U.S. where the yield on a 10-year bond now average 1.3 percent – 1.47 percent as at, Thursday 5th September 2019, makes it attractive to invest in a Nigeria bond that will give an average yield of 7 percent.

“This increasing attraction of foreign investors has led to an increase in the size of dollar resource at the disposal of these Nigerian banks like First Bank, Zenith Bank, Access Bank, and others, hence, their decision to quickly repay their future dollar debt obligation before yield environment normalized in the U.S. and their dollar reserve weaken,” Damilare maintained.

On his outlook for the Eurobond market, the GTI researcher suggested that the Nigerian Eurobond market will continue its bullish march, given that the ongoing trade tensions and other global headwinds will make it hard for economies like the U.S., China and in Europe to price investors from Nigeria.

Damilare said, “I think the need for the U.S., China, and Euro-Area to maintain accommodative monetary policy environment in the near term, due to the effect of the trade tension and other global headwinds, will make the Nigeria Eurobond market to remain bullish in the near term. However, I do not rule out a quick turnaround if the U.S. and China ease the current trade tension.”