Nigeria’s debut Eurobond seen oversubscribed

LAGOS (Reuters) - Nigeria’s $500 million debut Eurobond is expected to be significantly oversubscribed, as investor appetite for high-yielding assets outweighs concern about its depleted oil savings, sources close to the deal said.

 Bids during the book building process on Friday pointed to a yield of 6.5-7.0 percent for the 10-year bond, sources said, with the subscription and pricing due to be announced later.

 “There is a high level of excitement over the deal ... The challenge the government faces will be that of allotment,” said one senior government official, asking not to be named.

 A successful issue by Africa’s top oil exporter could reassure others on the continent of the strength of demand for African debt, convincing them to press ahead with similar but delayed plans.

 Nigeria issued guidance on Thursday indicating a yield of 7 percent plus or minus 25 basis points, above West African peer Ghana, whose 8.5 percent Eurobond due 2017 was yielding around 6.2 percent at 1130 GMT.

 “The average bidding that we’re getting ... is at the top end of 6, probably 6.5-7.0 percent. It is higher than Ghana,” one source close to the deal said.

 Market sources said there was around $1 billion in demand, meaning the offer could be two times oversubscribed, nonetheless a lower level of appetite than some analysts had expected.

 While demand for high-yielding assets, the paucity of West African credit and the relatively low volume of the issue are expected to fuel appetite, some potential investors have been put off by the rapid depletion in Nigeria’s oil savings.

 Fitch assigned the issue a ‘BB-’ rating on Friday, saying low debt ratios and robust growth played in Nigeria’s favour, but also noting concern about a decline in reserves last year despite a rise in oil prices and production.

 “Reserves have risen around $1 billion since the end of 2010, but in the absence of fundamental institutional reforms on the usage of oil revenues and savings, this gradual build-up is unlikely to be sustained,” Fitch said.

 One leading fund manager who participated in Eurobond issues by Ghana and fellow African oil producer Gabon at the end of 2006 said he was steering clear of Nigeria’s offering given concerns over the huge outflows from oil savings.

 

 VANISHING SAVINGS

 Nigeria’s excess crude account (ECA), into which it saves oil revenues above a benchmark price, has dwindled to less than $1 billion from $20 billion at the start of the current presidential term four years ago.

 Foreign reserves, of which the ECA is a part, inched up month-by-month to $33.5 billion by mid-January but are still down more than a quarter on year-ago levels.

 Nigeria has shrugged off the concerns, saying the spending was needed to defend the naira currency against increased dollar demand, fund projects in the power sector, and provide seed funding for a planned sovereign wealth fund, which should form a firmer legal basis than the ECA for safeguarding oil savings.

 Central Bank Governor Lamido Sanusi told Reuters late on Wednesday he believed the fall in reserves would end as the country’s banking sector gets back on its feet after a 2009 bailout and as oil production and prices rise.

 “We had to draw on forex (reserves) to meet elevated (dollar) demand levels as we couldn’t risk an accelerated exit from quantitative easing while banking reforms were still at initial stages,” Sanusi said.

 “Now with monetary tightening, higher yields, a recovering equity market ... and progress on banking resolution, a higher oil price and stable output, my sense is that the reserve attrition will stop,” he said.

 The point of the Eurobond issue by Sub-Saharan Africa’s second-biggest economy is to set a benchmark yield curve in the global market, rather than to raise funds, meaning the country has ample funds to repay investors.

 Standard Bank analyst Samir Gadio pointed out Nigeria’s foreign reserves were 67 times the Eurobond size and that its external debt-to-GDP ratio was just 2.3 percent.

 “Overall, the risk of default on the Eurobond is marginal,”  he said in a research note.