Fidelity Bank issued a 5-y USD300m Eurobond with a coupon of 6.875%. The issue price was 99.48 and the spread 635 bps over UST (7% yield). In our view, fair value was probably initially between 6.5% and 6.75%, slightly below the actual yield at issuance. That said, we expected the bond to trade at a premium to Access Bank 17s (475 bps over UST) and GTB 16s (421 bps) which is consistent with the fundamentals of these respective institutions.
We suspect Fidelity Bank 18s should deliver some price upside for a number of reasons. First, the feedback from global fixed income investors is that the deal was not widely marketed which explains why the order book may have been below potential. As such, a number of offshore accounts have yet to get familiar with the name and possibly involved in the secondary market. In this context, a slight drop in the bond’s price post-issuance actually represents a buying opportunity. Second, the Eurobond offers some decent yield pick-up in an environment characterised by low global rates and ample liquidity. On the sovereign side, these dynamics were clearly illustrated by the recent successful issuance of the Rwandese Eurobond. Third, the typical demand-supply mismatch for SSA Eurobonds will most likely eventually result in further spread compression. Fourth, the domestic bid from Nigerian financial institutions will squeeze supply as has been the case with the GTB and Access Bank USD bonds in the past. This favourable bias often reflects the Nigerian banks’ need to match their USD assets and liabilities.
Fidelity Bank is a mid-size (Tier II) bank more focused on the middle market of the Nigerian economy. Its strength is the capital adequacy ratio (28.5% as of Sep 2012) and a decent liquidity ratio. Still, the cost of funds is relatively higher (around 7%), the ROE is more modest (11.3%) and the level of NPLs is above average vs peers. Further improvement in operating efficiency will probably be required.
Gadio Samir, Emerging Market Analyst
(Standard Bank Plc)