The Nigerian Eurobond: An Appraisal

Lagos, Eghes Eyieyien, Group CEO, Pharez Ltd, 24th January, 2011.

The Financial Times of London has been proved wrong. It reported on 20th January,
2011, in a most cynical tone that investors were not interested in the Nigeria Eurobond
because of its ratings. And yet, the bond issue has been 250% over-subscribed!

Reuters had also reported on Friday, 21st January, 2011, that “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. Similarly, Standard
& Poor’s assigned a 'B+' long-term senior unsecured debt rating to the issue.

The over-subscription of the Nigerian Eurobond is very significant. It indicates

unequivocally that knowledgeable international investors still consider Nigeria a
good investment risk despite what the rating agencies have said.

A rating of a securities issue is usually benchmarked to the issuer's rating. It is,

therefore, not surprising the rating assigned the Nigeria Eurobond by Fitch and Standard
& Poor's.

The concerns about the depletion of our Excess Crude Account and the reduction in our
Foreign Reserves are not strongly sufficient grounds to have rated the Eurobond the way
Fitch and S & P did.

Unfortunately, Nigeria still suffers perception problems that make analysts exaggerate
our country risk despite our macroeconomic fundamentals. I personally think
Nigeria's actual rating should not be less than BBB. Indeed, there is no greater vote of
confidence in a financial security and its issuer than when the financial instrument is
over-subscribed, as the Eurobond was, despite how it was rated.

Concerns – Reality and Perceptions

Some people have questioned whether Nigeria actually needed to have issued the
bond at this time. I believe the Eurobond would help open up international financial
markets to Nigerian corporates wishing to raise funds by fixed-income securities by
providing a benchmark against which the debts would be priced.

Some commentators have dismissed this sarcastically but it is a relevant point to make.
It will have the same effect as when Nigeria got its first international sovereign rating
while Dr. Ngozi Okonjo-Iweala was our Finance Minister.

Let me explain it this way: if you have shares in a company which is not listed on the
stock exchange and you want to sell your shares, it is difficult to establish an objective
and fair value for the price as there is no active on-going trade in the stock. There are
many valuation methods one could use to fix a price but they are all subjective as you
may be selling for less or more than the real value. It is the constant interaction between
buyers and sellers in a market that gives you an idea of what the right price of an asset
is. In the same way, trade in the Nigerian Eurobond would give an indication of
investors' perception of the nation's credit-worthiness and help in
benchmarking debt instruments issued by Nigerian corporates subsequently.

Another frequently voiced criticism of the Nigerian Eurobond is whether Nigeria needs
to borrow at all. While the aversion to debt is understandable given our recent history
of being debt-laden by our obligations to the Paris and London Clubs, we still can do with

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the financial leverage that debt funding provide.

Our external debt stock as at September, 2010, stood at $4.534Billion and,

compared with our Gross Domestic Product, is very much at sustainable levels.
Given our present and expected liquidity profile in the short to medium term, our
capacity to repay our debts is not in doubt. Moreover, these loans are for infrastructural
development, and were granted at concessionary interest rates (averaging about
2.5%) and have long moratorium periods.

We would have been doing ourselves a disservice if we had missed the opportunity to
draw them. The critical thing is that these facilities must be used for the purposes
granted and both the National Assembly and the citizenry must hold the Federal
Government accountable to ensure that the fiscal irresponsibility, fraudulent
practices and maladministration that resulted in the debt overhang of the
1980s and 1990s are not repeated.

Back to the major concerns raised by Fitch: the reduction in our Foreign Reserves is
essentially because we consume too much foreign exchange as an import-dependent
nation while being susceptible to the vagaries of the crude oil market and the operational
risks (including militancy in the Niger Delta which, happily, has abated) associated with
crude oil production.

The CBN sells on average $250million bi-weekly at each of its Whole-sale Dutch Auction
System (DAS). It sold $300million at the last auction on 17th January, 2011. While
crude oil prices have increased considerable, they are not (and may not be for quite a
long while) at the $140-$160 per barrel levels which made it easy for the Obasanjo
regime to build up our External Reserves, which hit $63Billion at a point, and provided
accumulated monies in the Excess Crude Account (ECA).

Though commendable, the creation of the ECA, as we know, was actually illegal since it
was contrary to the Constitution which stipulates that the Federal Government is bound
to share all federally accruable revenue in the manner specified therein. The government
of former President Obasanjo made a mistake by not ensuring legislation was passed to
make it legitimate. When late President Yar'adua came into office, and as an advocate
for the rule of law, he had no choice but to succumb to the pressure from the State
Governors who had always wanted the funds in the ECA to be shared. President
Jonathan was equally legally bound to do the same; hence the depletion in the ECA
which we see today. But now, at the instance of Olusegun Aganga (whom some people
have been unfairly lambasting in the media as "clueless"), a Sovereign Wealth Fund is to
be established to manage the excess crude proceeds and the bill is currently before the
National Assembly for passage.

Some people have rightly pointed out that the bond's Coupon Rate is too high at 7%
and compared it with the bond issues of Ghana and Gabon which were at lower
rates. There is a difference between the Coupon Rate of a bond or other security and it’s
Yield Rate.

The Coupon Rate is the interest rate or nominal cost of the bond at issuance and which
is the fixed income earned by investors who hold it till maturity or whenever the periodic
interest (usually half-yearly) is being paid. While the Yield is the price (interest rate) at
which the bond is traded on the market from time to time. While the real cost to Nigeria
is the Coupon Rate which it must pay when due, the Yield is more important to investors
who essentially buy it for trading to earn some capital gain when they sell above the
sum invested.

Consequently, though the coupon rate is 7% it may actually trade at a discount of say
4% if investors have confidence that the risk of default is negligible. What they want is

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assurance of the liquidity and safety of their investment.

Nevertheless, I am also of the opinion that the coupon rate should not have been more
than 5%. But when you issue a debut bond and you have perception issues
Nigeria had to contend with, you have little leverage to make the initial rate
low.

Conclusion
The issue is that, despite our impressive macro-economic fundamentals compared to
other African and emerging market countries, many analysts in the west ALWAYS
exaggerate Nigeria's country risk.

Somehow, no matter how good things may be and no matter how positive the outlook
for the country is, their journalists, financial analysts, diplomats, political pundits etc.
always think Nigeria is at the verge of collapse!

And our own pessimistic and ever-negative opposition politicians, some human rights
activists, many journalists (particularly those of the ilk of sensational news type!) do not
help matters as they promote this misconception of Nigeria's imminent failure.

But we are still here! We have always surprised them. The second civil war they have
been expecting since the June 12 imbroglio has not happened. And the break-up of
Nigeria which they are expecting in 2015 will not also happen! For them, Nigeria is an
enigma.

God Bless NIGERIA!!

REFERENCES:
1. Jan 21 - Investors shun Nigeria's $500 million Eurobond http://234next.com/csp/cms/sites/Next/Money/5664932-147/story.csp
2. Jan 21 - Nigeria's $500m Eurobond ALERT - Offer oversubscribed, Approx $1.3bn raised. http://www.proshareng.com/news/12940
3. Jan 21 - Nigeria debut Eurobond heavily oversubscribed http://www.proshareng.com/news/12942 REUTERS
4. Jan 23 - Investors affirm confidence in Nigeria's economy http://234next.com/csp/cms/sites/Next/Money/5664932-147/story.csp