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Nigeria, others’ Eurobonds hit new lows

By on October 1, 2015

Prices for Eurobonds from Nigeria and many commodity-exporting emerging markets have fallen sharply this week on fears that the latest metals price reversal will hit the ability to repay debt, especially in some African countries.

According to Reuters, a major casualty of the metals’ price plunge is Glencore , whose bonds and shares have tanked to a record low. Almost a third of the mining and trading firm’s value was wiped out on Monday alone.

The moves underscore the challenges faced by economies and companies exposed to the sector and to China’s slowdown.

Fears of job cuts by Glencore and other mining firms are weighing on the assets of producing nations, especially Zambia whose kwacha currency plunged 17 per cent on Monday to record lows. Glencore has mooted slashing 3,800 jobs in Zambia, where it is the second biggest employer.

Prices for Zambian sovereign dollar bonds have also hit their lowest ever levels..

The weakness has fed through the African Eurobond market, sending Gabon’s 2024 dollar-denominated bond to a record low and Ghana’s 2023 issue to its weakest in 10 months. Angola’s 2019 and Nigeria’s 2021 Eurobonds are meanwhile changing hands at their cheapest price for a month, according to Tradeweb data.

Prices have fallen between 10 and 20 cents so far this year.

For seven years, bonds from sub-Saharan Africa enjoyed a warm welcome from yield-hunting investors. But clouds started to gather this summer, when Zambia had to fork out a hefty 9.375 per cent interest rate on a $1.25bn Eurobond.

In contrast, Zambia’s debut Eurobond in 2012 received a rapturous welcome, paying 5.625 percent on a $750m issue that was 15 times subscribed.

“Everyone is looking over their shoulder right now, saying ‘ok, let’s do some extra work and decide whether or not we want to hold some of these credits’,” said Kevin Daly at Aberdeen Asset Management.

Zambia shows it will be both costlier and harder for countries to refinance maturing debt.

The picture now is of slower growth, budget deficits and fears that countries could slide back into the debt trap, a decade after sweeping debt forgiveness deals.

Reassurance provided by low debt-to-GDP ratios is also eroding as sharp currency depreciation raises repayment costs as well as debt ratios in local terms.

More defaults are likely across emerging markets, the Head of Research at Renaissance Capital, Mr. Charles Robertson, warned, adding that “the rally in the dollar and low commodity prices may well continue for many more years than markets currently assume.”

Meanwhile, the International Monetary Fund warned on Tuesday that emerging market firms, which together have amassed a record $18tn of debt, need careful monitoring as the era of record low global interest rates comes to an end.

Nigerian banks including Guaranty Trust Bank Plc, Access Bank Plc, First Bank of Nigeria and Diamond Bank Plc have issued Eurobonds.

In its latest Global Financial Stability report, the IMF said the biggest rises in ‘leverage’ – the amount of debt relative to a firm’s equity – had come in “vulnerable sectors” like construction, mining and oil and gas, and were increasingly exposed to currency risk.

The IMF also warned that years of record low rates had meant that despite weaker balance sheets, emerging market firms had been able to issue more bonds, and at better terms.

Slumping commodity prices, the threat of rising US interest rates, exacerbated in some cases by ugly national politics, have whipped up a near perfect storm for emerging markets this year.

The IMF called for countries to keep a careful eye on their big firms as the global backdrop begins to change. More data was needed, particularly in areas such as how much debt firms had in currencies other than their own.

Many major emerging market currencies have dropped between 20-40 percent against the dollar over the last year which will make paying back any ‘unhedged’ dollar debt far more expensive.

“As advanced economies normalise monetary policy, emerging markets should prepare for an increase in corporate failures.”

“Monitoring vulnerable and systemically important firms, as well as banks and other sectors closely linked to them, is crucial,” the report said.

 

[Punch]