FBNFirst Bank of Nigeria (BB- [S&P]; B+ [Fitch]) plans to issue a USD300m Tier II Eurobond following an investor roadshow in the UK and US, in line with recent reports suggesting that the institution would tap global capital markets this year.

Initial terms disclosed in the media suggest that FBN will seek to place a 7-y callable subordinated instrument with a yield guidance of 8.5%. The new bond is allegedly callable after five years. It is expected to be rated B by S&P and B- by Fitch.

At such levels, we feel that the forthcoming Eurobond will be fairly valued, offering a spread over 5-y and 7-y UST of 705 bps and 650 bps. Meanwhile, the respective spread differentials between the First Bank of Nigeria 20s and the Nigeria 18s and Nigeria 21s will be close to 390 bps and 325 bps.

 

The other Nigerian corporate (albeit unsubordinated) Eurobonds trade at 465 bps, 583 bps and 661 bps over UST in the case of Guaranty Trust Bank (due in 2016), Access Bank (2017) and Fidelity Bank (2018). The unsubordinated Guaranty Trust Bank notes are probably the most relevant benchmark to derive the fair pricing of the First Bank of Nigeria Eurobond; then, the valuations have to be adjusted upwards for the tenor and limited liquidity and size (Guaranty Trust Bank sold USD500m in 2011) as well as the extra premium required to compensate investors for the Tier II nature of the new Eurobond and a new issue premium. This will bring the fair value yield to around 8.5%-8.75%, but the strong brand and reputation of the bank will probably allow it to come to the market near the lower end of this range (if not below).

 

A number of factors will support the Eurobond sale. First, it is worth noting that First Bank of Nigeria has established a track record in the market, having issued a USD175m Tier-II Eurobond in 2007 and called it in 2012. The note paid a coupon of 9.75% for the first five years and was theoretically expected to pay 3M LIBOR +6.54% afterwards. Second, First Bank of Nigeria is the largest bank by assets in the country and therefore too big to fail in case of an adverse shock. Third, other domestic banks are natural buyers of Nigerian corporate Eurobonds as they need to balance their USD assets and liabilities, which has generally ensured some extra demand for such issues on top of the international bid, although this may be somewhat constrained by the Tier II form of the new notes.

 

The concern is that a Tier II corporate Eurobond is likely to sell-off more aggressively in a risk-off environment; for example, the yield on the retired First Bank of Nigeria Eurobond rose up to 40% during the worst phase of the global financial crisis in late 2008, a level which was clearly in disconnect with the bank’s ability to service its USD liabilities. This subsequently generated significantly attractive re-entry levels when international markets firmed up in late 2009. While such extreme yield volatility is unlikely to repeat in the foreseeable future, the uncertainty associated with the pace of the QE programme in the US may well still weigh on market sentiment and performance in coming months, and this has the potential to affect the First Bank of Nigeria Eurobond more than other mainstream USD issues.

 

Samir Gadio

Emerging Markets Strategist

Standard Bank Plc