Banks may be pricing in currency adjustment in Eurobond recall

Nigerian banks that hitherto issued dollar-denominated bonds may have started weighing the implication of the much-pushed foreign exchange (FX) rates unification as a decision that could increase their obligations on the outstanding notes.

Three banks – Access Bank, First Bank of Nigeria Limited and Ecobank Nigeria – have so far this year redeemed before maturity as much as $1.1 billion worth of outstanding Eurobond notes issued in 2014.

The latest is Zenith Bank, which recently recalled its outstanding 2022-dollar notes worth $500 million. This would bring the total value of early redemptions in 2019 to $1.6 billion.

Fidelity Bank plc’s $400 million outstanding Eurobond is due in October 2022, while UBA plc’s dollar notes worth N500 million are due in June 2022.

The early redemptions could be as a result of fears of an imminent currency adjustment that could increase obligations of these banks in domestic currency, according to research analysts at Lagosbased United Capital plc.

“With maturities of most of these Eurobonds scheduled for 2021-2022, the banks are likely pricing the next devaluation to happen any time from 2020,” United Capital analysts said in a recent note to clients.

The International Monetary Fund (IMF) recommends unifying Nigeria’s multiple foreign currency rates around the Investors and Exporters (I&E) FX rate. Angola, GuineaBissau, Iraq, Mongolia, Myanmar, Nigeria, Sudan, Trinidad and Tobago, and Ukraine are the only countries, based on IMF data, that have multiple exchange rate systems.

Many investment bankers are making strong case for a unified exchange rate regime.

Temitope Popoola, chief executive officer, Nigeria/west Africa at Renaissance Capital, said Nigeria has gone from a situation where “we had over five exchange rates to two”.

“Nigeria needs to go one step further and finally eliminate multiple exchange rates. Investment would be easier with converged FX rates and based on the trend of current rates, and the success of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) window, this possibility is not that far-fetched,” Popoola said.

“Additionally, the liquidity management efforts of the CBN, by keeping Cash Reserve Ratio (CRR) at 22.5 percent, has helped keep rates relatively stable by reducing naira liquidity. Part of which could otherwise have pressured FX rates. Rates are converging and the difference between the different bands has tapered, partly due to efforts by the CBN but admittedly there is more they could do. Though, there are hard choices ahead of us and a significant fiscal element related to any attempt to further converge FX rates,” he said.

Wale Okunrinboye, head of investment research at Sigma Pensions, had told Businessday that when banks are recalling or redeeming their Eurobonds, “it is a signal that there aren’t many dollar lending opportunities in the economy”.

The Nigerian economy grew less than 3 percent in the last four years with a slower growth pace of 1.94 percent in the second quarter of the year compared with a revised growth of 2.10 percent recorded in the previous quarter. Dollar lending opportunities which predominantly abound in the country’s oil and gas sector have also come under pressure, no thanks to the lower crude oil prices in the international market.