An N18.5 billion naira bond by Nigeria’s Imo state to help fund infrastructure was fully subscribed, the issuing houses said on Tuesday, a further sign of Nigeria’s deepening domestic debt market.

The 15.5% fixed-rate paper, due in 2016, is part of a N40 billion medium-term issuance program by the south-eastern state of Imo to finance water and road projects and the construction of a new conference center. Imo is one of three states in Nigeria, Africa’s most populous nation, to have launched bonds since last December, as Nigerian pension funds and asset managers become more comfortable with fixed income and less reliant on equities in their portfolios.

“All 22 applications for 18.5 billion units of the bond totaling N18.5 billion were found to be valid, accepted, and processed accordingly,” the issuing houses, including UBA Capital and Stanbic IBTC, said. “The issue was therefore 100% subscribed,” they said in a notice published in the This Day newspaper.

The bond, listed on the Nigerian Stock Exchange (NSE), is secured by an irrevocable payment order on the state’s budgetary allocations from Nigeria’s federation account, which is funded by oil revenues and taxation. More than two thirds of the proceeds are to be used to finance the state’s equity share in a conference center and holiday resort, while 20% will be spent on roads and around 7% on rehabilitating semi-urban water projects.

Nigeria’s federal government introduced a 20-year paper last November which established a benchmark yield curve, allowing some of the country’s 36 states to take advantage of investor interest in debt and issue their own bonds. Further state bond issues are expected this year.

Nigerian fund managers have been switching into government debt from equities in recent months, partly to recoup losses on the stock market, which is down around 60% from its peak in March last year. Yields on the 20-year federal government bond have fallen from around 13% to 10% as demand has increased, while state bonds have even more attractive coupons. “The Imo state bond has a coupon of 15.5% for example, compared to a government bond with a similar maturity that yields 9-10%,” said Stuart Culverhouse, Chief Economist for Exotix, a frontier market specialist in London.

Kwara state said last week it had issued a N17 billion five-year bond with a 14% coupon, the first tranche of a N30 billion issuance program meant to help fund infrastructure development. Lagos state, Nigeria’s commercial hub and its most populous city, plans to issue a second naira bond this year after its N50 billion issue in December was oversubscribed.

However, currency risk is a concern for foreign investors. “I think foreign investors are starting to look at the bond market more closely but they are concerned about the exchange rate policy,” Richard Segal, Economist at UBA Capital, said. The recent devaluation of the naira, now selling at around 150 to the dollar at central bank currency auctions compared with 117 less than a year ago, has left sentiment fragile and unnerved some foreign investors. Higher oil prices of around $70 a barrel, up from half that level at the start of the year, means Nigeria’s foreign reserves are falling more slowly but instability in its Niger Delta oil heartland means production remains off target. A renewed fall in oil prices, predicted by some analysts, could once again put the naira under pressure.

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UBA | Stanbic IBTC | Exotix

Source(s): CNBC