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Banks rush to exit Eurobond market by August




The rush for Eurobond market by deposits money banks, DMBs, seems to be coming to an end with the recent stay-away moves by operators. After 14 August, there will be no United States dollar denominated subordinated Nigerian bank bonds outstanding, Tellimer Research has hinted.
A few years ago Nigerian banks were scrambling for Eurobonds and foreign currencies denominated loans because of their lower rates to grow their balance sheets and aspire to the tier one capital banks in the country. But the difficulty facing the local currency, the naira, following the devaluation in 2016 practically left most of the banks exposed and badly diluted the quality of their assets.
Some analysts say that the reason may not be unconnected with pressure on statement of financial position. They noted that the driving factor of its usefulness is being vitiated by being subordinated in relations to the apex bank calculation of banks` capital adequacy ratio.
Kingsley Ezoh, Lead consultant with LSintelligence Associates said the need to reduce foreign currency exposures, cost and upgrade asset quality could account for the bearish stance.
“Apart from cost, any funding sources that do not align with CBN calculation of capital adequacy ratio would not be necessary. The thing is, you don’t borrow if you don’t need funds. Banks know better”, Ezoh added.
Tellimer Research, former Exotix Capital, revealed that the Nigerian bank Eurobond universe is fast disappearing. The firm stated that Guaranty Trust Bank did not replace a senior bond, which matured in November 2018 and defunct Diamond bank’s sole Eurobond was repaid in May.
It recalled that Access Bank Plc redeemed a $400 million subordinated bond in June and First Bank of Nigeria has called in its $450 million subordinated bond, and will repay this amount on 23 July.
In the same vein, Ecobank Nigeria has also called in its $250 million subordinated bond, with repayment now expected on 14 August. Tellimer Research noted that both First Bank and Ecobank will exit the Eurobond market following the call dates, though the parent company of Ecobank Nigeria does have a bond outstanding.
“After 14 August, there will be no dollar denominated subordinated Nigerian bank bonds outstanding”, Tellimer Research stated.
According to Tellimer Research, the much-discussed dearth in Eurobond supply partly reflects subdued demand for foreign currency loans. “Could this change? We believe there are at least three reasons why it could”, Tellimer remarks.
First, based on Bloomberg data, a $3.25 billion dual-tranche Dangote Industries loan will mature in August 2020. If this facility is renewed with participation from Nigerian banks, we could see primary market activity increase, Tellimer said.
“Second, headlines suggest lending to the oil & gas sector may be on the rebound. As examples, in a recent presentation, Seplat stated that funding for a $700 million gas processing project will be provided – in part – by local banks.
“In addition, earlier this month, Green Energy International Ltd, which is developing a marginal field, announced that it had signed memorandum of understanding, MoU, for a total package of $350 million – though this funding appears to have come from international banks, the firm stated.
The firm recalled that the CBN has stated that the banking sector will be recapitalised over the next five years, leading some to speculate that as in 2004/5, the minimum amount of capital required to operate may be increased.
According to Tellimer, this could lead to further mergers and acquisitions in the banking sector. If this happens, it is possible that some banks may choose to fund such activity by issuing new bonds – though we acknowledge that equity funding may well be preferred by the banks, and/or by the regulator.
Meanwhile, the CBN announced that a minimum loans/deposit ratio of 60% will be required from the end of September. The regulator has also reduced the maximum remunerable amount under the Standing Deposit Facility to N 2 billion from N7.5 billion. These measures are just two examples of changes the regulator is making to encourage banks to lend.
“We acknowledge that these changes introduce uncertainty and may lead to concerns about profitability and asset quality. However, we do not believe a regulator that rescued Polaris Bank (formerly Skye Bank) and was instrumental in Diamond Bank’s merger with Access Bank will implement changes in a way that compromises financial stability”, Tellimer stated.

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