How Eurobond sale can rejig economy

Story by Omodele Adigun

As part of efforts to fund this year’s budget deficit, the Federal Government is to float $1 billion Eurobonds to boost large injection of capital into the economy.
According to the Director General of Debt Management Office (DMO), Dr. Abraham Nwankwo, “all borrowings would be used for capital projects.” This is in line with the plan of the Federal Government to make more funds available for capital investments.
On the fears that the downgrade by the global rating agencies may truncate the plan, Nwankwo said: “Those people are saying oh, there is a downturn. So we can grade you. That does not change anything because there is already a downturn. So our challenge is how to move from downturn to recovery. We’ll raise all the moneys  we want. Remember we have various sources, the options are open to us. We have the multilateral financial institutions, the World Bank, ADB, the China Exim. We are mixing all those points. So that is the responsibility you are giving us to make sure that during the year, we raise all the moneys you told us to raise for you, based on what is available on the market. We will try to see what is the right mix of the sources that will give us the N1.84 trillion. The most importortant thing, I can assure you, is  that we will get the N1.84 trillion and the N900 billion external borrowing, using the mixture of sources. But the sources I can’t say. But we will get from ADB, we will get from China Exim. We will prospect international capital market, depending on the situation.
“Of course, as said earlier, just as we have the domestic market, so also is the external one.When we go, we won’t say we will take the moneys from a particular source. If it is not favourable, we won’t take it. We will concentrate our focus on those ones that are favourable. But overall, I can assure you we will be able to raise the moneys so that the budget is funded as planned.
“As far as the rating is concerned, it is the job of all of us to continue working. In the next five years, If we work hard, and recover the economy, we become rated as AAA. So our fate is in our hands.”
What is Eurobond?
Investopedia online defines it as a bond denominated in a currency not native to the issuer’s home country. Eurobonds are commonly issued by governments, corporations, and international organisations.
How does it work?
Investopedia explains: “Let’s assume Company XYZ is headquartered in the United States. Company XYZ decides to go to Australia with bonds denominated in Canadian dollars. This is an example of a eurobond. In many cases, an issuer sells its eurobonds in a number of international markets. Company XYZ might sell its Canadian dollar-denominated bonds in Japan and Canada too.
Advantage
Another online medium, InvestingAnswers, Inc. says “Eurobonds give issuers the opportunity to take advantage of favorable regulatory and lending conditions in other countries. Eurobonds are not usually subject to taxes or regulations of any one government, which can make it cheaper to borrow in the eurobond market as compared to other debt markets. Eurobonds often trade on an exchange — most often the London Stock Exchange or the Luxembourg Stock Exchange — and they trade much like other bonds. The eurobond market is considered somewhat less liquid than the traditional bond market, but is still very liquid. Eurobonds are usually “bearer bonds,” meaning that there is no transfer agent that keeps a list of bondholders and arranges the interest and principal payments. Instead, holders receive interest when they present the coupon to the borrower, and receive the principal when the bond matures and the holder presents the physical bond certificate to the borrower.”
Challenges
“Borrowing in foreign currencies also present risks in addition to the standardcredit risk and interest rate risks. Eurobonds are exposed to exchange rate risk, and because exchange rates can change quickly and dramatically, the total return on a eurobond can be affected dramatically in a very short amount of time.”
Prospect
Recall that Standards & Poor’s (S&P) Global Ratings, just last week, downgraded Nigeria into junk territory just as the nation prepares to issue the Eurobond, first after the 2013 debut, amid low oil prices and severe scarcity of foreign exchange(forex).
The rating agency lowered Nigeria’s rating one level to B, five levels below investment grade and in line with Kyrgyzstan and Angola. The outlook was changed from negative to stable.
Giving reasons for its decision,S& P  said: “Nigeria’s economy has weakened more than we expected, owing to a marked contraction in oil production, a restrictive foreign exchange policy and delayed fiscal stimulus.
The downgrade is the latest blow to the economy, which shrank in the last two quarters and is headed for its first full-year recession since 1991, according to the International Monetary Fund(IMF).
Commenting on the prospect of the $1billion Eurobond in the face of the downgrade, Babajide Solanke, an analyst at Lagos-based FSDH Merchant Bank Ltd told a foreign medium : “The downgrade will make Nigeria’s foreign and domestic bonds less attractive. Investors will be concerned about the risk posed by falling oil prices on the government’s ability to pay back the debt.”
The yields on the nation’s $500 million Eurobond due in July 2023 have fallen almost 280 points to 6.63 per cent since peaking at 9.4 per cent on January 18. The bonds have returned 14 per cent this year, compared with the average of 16 per cent for sub-Saharan African sovereign dollar debt, according to Bloomberg indexes.
Like other bonds, eurobonds obligate the borrower to pay a certain interest rate and principal amount according to theterms of the indenture. However, eurobonds often pay interest annually rather than semi-annually, like U.S.  corporate bonds.
The less-frequent coupons make eurobonds somewhat less valuable — and thus require higher yields — than traditional U.S. corporate bonds. Even if both investors receive the same amount of interest every year, the difference in payment frequency means that investors should compare eurobonds to other bonds very carefully.
The government revenues dwindled by the fall in global oil prices to roughly half their levels from 2014.
S&P expects Nigeria’s economy to contract by one per cent this year before returning to growth. Real gross domestic product(GDP) is likely to expand 2 percent in 2017 and 4 per cent the following year, it said in the statement.
“We believe that since passing the fiscal budget, government spending together with liberalization of the interbank foreign-exchange market, may boost the economy and spur positive GDP growth next year,” S&P said.
Moody’s Investors Service and Fitch Ratings Ltd. each downgraded Nigeria to four levels below investment grade in the first half of the year.

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