Constraints of raising funds from local market

The high cost of issuing long-term domestic debt, which has spurred banks’ increased appetite for external borrowings through Eurobonds, has become a source of worry to stakeholders.

This is because the factors that will prevent default, neutralise the negative impact of the devaluation of domestic currency on repayment as well as mitigate currency risk like foreign exchange earning assurance and derivatives contracts are not fully operational.

Investors called for a downward review of interest rates to boost investment in the nation’s capital market to enable the banks to service their obligations from local sources and make the market more attractive for issuers to raise funds.

With virtually all the deposit money banks (DMBs) approaching the international capital market to access cheaper long-term funds to the tune of $1.6 million, stakeholders have warned that this could lead to severe exchange rate risks with affected companies having their profits eroded due to devaluation of the naira.

Stakeholders believe that the interest rate regime in Nigeria has not been very encouraging. They argue that monetary policy pronouncements in the country tend to be more reactionary to developments in the Nigerian economy.

They also noted that due to structural bottlenecks, organisations and institutions cannot efficiently adjust their goals and resources to changing constraints and opportunities, which has weakened the effectiveness of monetary policy initiatives.

President of Standard Shareholders Association, Godwin Anono, said these banks have resorted to Eurobond because of the uncertainties in the Nigerian economy that have caused a drought in IPO and collapse of the primary market.

He pointed out that they needed to shore up their balance sheet that is negatively impacted by the devastating effect of recession and covid 19 crises.

He, however, stated that in the event of a surge in the dollar, and instability in the exchange rate, servicing such huge obligations may affect banks’ bottomline and ability to pay dividends.

Anono stressed the need for banks to borrow in local currency and structure their financing through the capital markets to ensure that the transactions are bankable, and the costs reflect reality.

Among those who explored Eurobond are Ecobank, Fidelity Bank and United Bank for Africa and Access Bank. Ecobank raised $350 million through Eurobond 2031 issue, recording more than three times oversubscription.

Fidelity Bank concluded a highly successful Eurobond offering, raising $400 million five-year tenor Eurobond, with a 7.765 per cent coupon. This is Fidelity Bank’s third outing in the Eurobond market, having previously issued in 2013 and 2017.

United Bank for Africa (UBA) has issued a $300 million Eurobond at a yield of 6.75 per cent to fund growth.

Access Bank Plc recorded a successful launch of a $500 million 144A/RegS Senior Unsecured Eurobond as part of its global medium-term note programme.

The offering achieved the lowest (outstanding) Nigerian bank Eurobond coupon, supported by an over three times oversubscribed orderbook of over $1.6 billion, which represents the largest orderbook by a Nigerian bank. The bond, which will mature on the 21st of September 2026, was issued with a yield and coupon of 6.125 per cent, with interest payable semi-annually in arrears. The coupon of 6.125 per cent is another first in the corporate Eurobond issuance space.

An independent investor, Amaechi Egbo said by issuing foreign currency-denominated debt instruments, Nigerian banks are exposing themselves to foreign exchange risk.

He noted that despite the fact that foreign bonds offer lower rates, there are risks involved. According to him, these banks will face foreign exchange risk over the life of the bonds when issued unless the government reviews the monetary policy downward.

Egbo urged the government to maintain stability in exchange rate to enable banks to service the loans and also add value to shareholders’ investment.

With rising political risks and fleeing capital, there are fears that the value of naira could plunge lower, putting more pressure on companies with dollar-denominated facilities.

According to the stakeholders, any foreign currency-denominated corporate bond issued by a local company imposes exchange rate risk on the issuer who earns their income in local currency. They added that any further devaluation of the naira henceforth would put the banks and companies borrowing abroad under pressure.

Vice President, Highcap Securities Limited, David Adonri said Eurobond is generally attractive presently due to the prevailing low-interest environment in the global market.

He pointed out that if the borrowing is judiciously applied, the benefits to the banks and economy are monumental.

However, he noted that issuing Eurobond goes with massive due diligence on the issuer, as well as its ability to meet the stringent rules and regulations of the host capital market.

Adonri admitted that the risk of default is very remote in Eurobond but added that if for any reason the bank defaulted in servicing the obligation, damage to the international capital market will be severe while the bank faces liquidity problems.

He categorically stated that the factors that will prevent default like forex earning assurance or derivatives contracts to mitigate currency risk are not in place in Nigeria.

“This will also neutralise the negative impact of the devaluation of domestic currency on repayment. Inflation is not a problem for any fixed-rate borrowing. Inflation reduces the long-term cost of borrowing. The repayment plan must ensure that the foreign currency earning capacity of the bank is adequate.”

Director, Centre for Economic, Policy and Research, University of Lagos, Professor Ndubuisi Nwokeoma, said: “I think it is all about hedging to avoid loss of value to the bank assets. Given the volatility of the exchange rate, acquiring assets in foreign currencies makes for better risk management.

A professor of economics at Olabisi Onabanjo University, Sheriffdeen Tella, said many of the banks involved have branches abroad with foreign currencies that can give them a safe landing.