Bonds Shrug off Moody’s Downgrade as Investors seek Yield

Nigeria’s bonds were flat on Wednesday, shrugging off a downgrade by Moody‘s, since investors had already factored in issues that triggered the rating change and were buying debt at a discount to book profits, traders said.

Ratings agency Moody’s cut Nigeria’s long-term foreign-currency bond to B1 from Ba3 and kept its outlook stable, saying Nigerian efforts to broaden non-oil revenue had been unsuccessful. The local-currency rating was unchanged at Ba1.

Domestic bonds traded unchanged after some foreign investors booked profits before the rating decision. Yield on the benchmark 20-year bond rose 10 basis points to 15.03 percent, traders told Reuters.

On the eurobond market, yields on Nigeria’s $500 million of bonds due 2018 rose to 3.60 percent on Wednesday from 3.08 percent. Yield on its latest $1.5 billion issue due 2032 climbed to 6.80 percent from 6.7 percent.

“Moody’s was a bit behind the curve with their downgrade. The effect on government borrowing costs may be negligible, as will the effect on foreign appetite for Nigeria’s eurobond issuances, given that the issues raised by Moody’s is already well known,” said Cobus de Hart, senior economist at South Africa’s NKC African Economics.

Nigeria’s government balance sheet remains exposed to financial shocks, with interest payments high relative to revenues and deficits elevated despite cuts in capital spending, Moody’s said.

“There was limited market reaction ... as most (sub-Saharan Africa) names are in sub-investment-grade territory, a downgrade does not materially affect the investor base involved in these markets,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank.

Nigeria exited a recession, brought about by low oil prices, in the second quarter of this year, but growth is fragile and inflation is still high, although trending downwards.

It now plans to issue a $2.5 billion eurobond before the end of the year to help fund its 2017 budget. It also wants to refinance $3 billion worth of treasury bills through international markets as it moves to borrow more abroad.

Nigeria now has 19.63 trillion naira ($62.42 billion) in local bonds and $64.2 billion in foreign loans as of June 30, according to the debt office.

On Tuesday, President Muhammadu Buhari presented to parliament a record 8.61 trillion naira budget for 2018 and said it would borrow abroad to cover half of its deficit for next year.

“External funding efforts may have suffered a blow,” said Michael Famoroti, analyst at Vetiva Capital. “With the government looking more aggressively to the eurobond market for 2018 and expected higher global rates, pricing becomes more of a concern.”

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