Diamond Bank issued its debut $200 million Eurobond on Wednesday, becoming the latest in a growing list of Nigerian banks to sell dollar-denominated debt.
Its Eurobond was issued at a yield of 8.75%, towards the higher end of the guide price of 8% to 9%. Citi was the sole bookrunner on the deal.
Diamond Bank initially announced it would attempt to raise between $300 million and $350 million from the debt market. However, the Eurobond issue was scaled down after early investor demand wasn’t as high as initially expected.
“The extra yield offered by Diamond Bank [this time] may partially reflect the fact that global fixed-income investors are not particularly familiar with the name,” says Samir Gadio, a London-based emerging market (EM) strategist at Standard Bank.
Indeed, Diamond Bank’s issue is not large enough to qualify for JPMorgan’s Corporate EM Bond Index Broad, and therefore is predicted to be less liquid in the secondary market, says Gadio.
In June 2013, Diamond Bank had planned to place a $550 million tier-II Eurobond, even completing an investor roadshow in the UK, Switzerland and US, but the issuance was shunned by investors and postponed due to the adverse market environment and a lack of interest.
However, Diamond Bank did manage to take a slight advantage of the current window of opportunity in global capital markets, characterized by the “recent compression in emerging market Eurobond spreads and benign treasury rates in the US”, says Gadio.
“Overall, the global market risk sentiment has been bullish in recent years and external funding costs have been subdued,” he adds. “Nigerian banks can borrow dollars relatively cheaply at the moment.”
Diamond Bank is planning to use a number of instruments to fill the bank’s funding requirements and the bank has asked for shareholders’ approval to raise $750 million in fresh capital, in addition to the recent Eurobond.
The bank has concluded $250 million in tier 2 capital via private placements and is working on a $300 million rights issue in naira equivalent. The remaining $200 million will be executed in another phase and the instrument will be determined by market conditions and need.
The first banks to issue Eurobonds out of Nigeria were First Bank and Guaranty Trust Bank (GTB) in 2007 which raised $175 million and $350 million respectively. Since then, both banks have returned to the Eurobond market and have been joined by Access Bank, Fidelity Bank and Zenith Bank.
The amount of outstanding Eurobonds floated by Nigerian Banks, including Diamond Bank’s most recent offer, reached $2.55 billion, up from negligible levels five years ago.
Union Bank is planning to seek shareholders’ approval in June to raise $750 million, while Ecobank and United Bank for Africa – both strong regional banks with bases in Nigeria – have not yet made any plans to issue.
The increasing frequency of Eurobonds by Nigerian banks highlights the country’s growing financial sophistication, diversification and the relatively cheaper rates of dollar fundraising compared with local currency fundraising.
“Investors are able to access higher yields in the corporate sector which typically start with the banking sector after the sovereign has issued,” says Jan Dehn, head of research at EM specialist fund manager Ashmore.
“The fact that banks are issuing Eurobonds in Nigeria indicates that the banking sector is healthy – something we began to see in 2008 and 2009 before the global financial crisis took hold.”
As the oil and gas sector in Nigeria grows, the need for dollar funding by large corporates is on the rise. To provide such funding, Nigerian banks will have to increase their dollar liabilities.
Gadio cautions: “Banks will need to hedge potential currency mismatches and/or ensure foreign-currency loans are primarily provided to entities generating dollar cash flows.
“While we expect the Central Bank of Nigeria (CBN) to continue to defend the exchange rate in the foreseeable future, one cannot entirely discount the possibility of foreign-exchange shocks in the long-run.”
He adds: “Another issue is that raising large amounts of capital may favour risky practices, especially if the funds are not effectively channelled into productive sectors of the economy. Nevertheless, the CBN has stepped up its financial supervision standards in recent years and should be able to step in before tangible systemic risks emerge.
“In fact, there have been few defined projects out of Nigeria, so banks will need to remain cautious.”
Nevertheless, Dehn concludes on an optimistic note. “Nigerian banks, like most of emerging market banks, are acutely aware of currency risks and are likely to hedge foreign-exchange exposures,” he says.
“Even the tiniest wrinkle in global risk appetite will mean that international investors will pull out of emerging markets. Emerging markets are at the mercy of global sentiment, which is often myopic and short term.”
Dehn adds: “I would argue that Nigerian banks are constricted in the amount of dollar debt that they can raise, especially as emerging-market sentiment has declined over the last 12 months while Nigeria’s economy and the oil and gas sector remain strong.
“In this case, the currency mismatch is actually the other way around – Nigerian banks cannot provide enough dollar funding for the growing oil and gas sector in Nigeria and this in turn could actually be holding back the economy.”