April 3, 2017
Nigerian banks have lost interest in fresh issues or refinancing of Eurobonds because firms no longer have appetite for dollar denominated debts in the country.
The volatility in the naira-dollar exchange rate in the last one year, has killed the appetite for dollar loans by Nigerian firms who before now, had preferred such loans due to the lower interest rates they attract.
The recent weakening of the naira has increased the naira value of dollar denominated loans, forcing many firms to either default on their obligations, or seek a restructuring of the facilities.
The naira has lost more than 40 percent of its value since a devaluation last June, putting pressure on firms with dollar denominated debts on their books.
On the supply side, banks are also facing increased prospects of refinancing at a higher cost, with the closest fixed-rate corporate Eurobonds currently trading at a spread of 250-300 basis points to FGN Eurobonds and the recent United States Federal Reserve rate hike which was only the first of more to come this year.
The median yield on outstanding Eurobonds taken up by the banks alone is 12.3 percent, according to BusinessDay calculations."Available dollar lending opportunities are slim, so banks will shelve refinancing their Eurobonds if they can," said Ayodeji Ebo, acting managing director at Lagos-based Afrinvest Securities.
"Most companies are requesting to convert dollar-denominated loans into naira for ease of repayment, because no one is certain of the direction the exchange rate is headed and people are unwilling to take avoidable risks."
First Bank, the largest bank by assets, has two outstanding Eurobond issues; a $300 million bond due August 2020 (at a 14.7 percent yield) and a $450 million bond due July 2021 (at a 15.55 percent yield), according to data compiled by BusinessDay.
Tier-one Access Bank, which has $12 billion of assets, has two deals outstanding - a $350 million Eurobond due this July (at a 9.36 percent yield) and a subordinated one of $400 million, maturing in June 2021 (at a 13.43 percent yield).
Guaranty Trust Bank, the largest bank by market capitalisation, has a $400 million deal due November 2018 (at a 9.46 percent yield). Segun Agbaje, the managing director, said at the bank's analyst conference that it is unlikely to refinance the issue and has already put in place a sinking fund to redeem the bond at maturity.
Zenith has a $500 million bond due in April 2019 (at a 10.83 percent yield), while Diamond has a $200 million bond due a month after, May 2019 (at a 13.75 percent yield).
Fidelity and Ecobank have $300 million (at a 17.92 percent yield) and $250 million (at a 11.76 percent yield) bonds due May 2018 and August 2021 respectively.
Oil and gas firms used to account for the larger chunk of lenders' dollar loans exposure, but a steep decline in oil prices made it difficult to meet payment obligations, thus jacking up the rate of non-performing loans to more than double the 5 percent limit set by the Central Bank.
At this time, rather than take up fresh dollar loans, most oil and gas firms are restructuring previous debt, Ebo observed.
Non-oil firms are also shaving appetite for dollar loans, with the likes of telco, Etisalat Nigeria and brewer Guinness, seeking debt restructuring and rights issues to offset suffocating dollar debts.
The exchange rate is beginning to stabilise but the appetite for dollar debt remains low, according to Ayo Akinwunmi, head of research at FSDH Merchant Bank.
"Banks that don't have receivables in dollars are likely to walk away from Eurobond refinancing options," Akinwunmi said by phone.
The naira has been on a rally at the black market and hopes are rising that at least three of the four different rates in the market are on the verge of a convergence, as the Central Bank pumps dollars into the market.
However, dollar supply sustainability will be crucial.
The naira reversed a three day gaining streak, to exchange at N385 per US dollar at the black market on Thursday, and exchanged at N314 per dollar as at 2pm, at the official market.
Guinness' relatively high debt (with over 40% in foreign currency related-party loan) has necessitated a move for a rights issue to deleverage its balance sheet and limit the impact of earnings erosion as a result foreign currency losses. It recently submitted a $127 million (N40 billion) rights issue application to the Nigerian Stock Exchange (NSE) for approval and listing.
Etisalat, on the other hand, attempted to restructure its dollar debt after a payment default this month.
A banker with knowledge of the negotiations, said that the seven-year syndicated loan, on which Etisalat Nigeria missed a payment, has a dollar portion of $235 million which the telecoms operator wants to convert into naira to overcome hard currency shortages on Nigeria's interbank market.
When some of these firms took up dollar loans, the naira exchanged for N199 to the US$, compared to the current official value of N305 to the US$ after monetary authorities threw in the towel on a 16-month old naira peg.
This has meant that loans taken barely a year ago have almost doubled in naira terms.