Before the next FGN bond auction scheduled for April 25, 2022

Friday, April 22, 2022 / 9:38 PM / by Meristem Research / Header Image Credit: Lightfield Studios

Problem on the offer/Summary

The Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will hold a Bond Auction on Monday, April 25, 2022. The total bid amount is expected to be between 210 and NGN 240 billion across three issuances. The instruments include two reopening issues (March 2025 and January 2042) and a new issue (April 2032).

13.53% FGN MARCH 2025 NGN 70 billion – NGN 80 billion

FGN APRIL 2032 70 billion NGN – 80 billion NGN

13.00% FGN JAN 2042 NGN70bn – NGN80bn

Analysis of current performance

At the last primary market (PMA) auction held in March 2022, demand for the instruments on offer remained strong, as evidenced by previous auctions during the quarter. While the subscription for the January 2026 instrument was 29.00% lower, the total auction subscription was 7.30% higher than the previous auction (598.42 billion NGN compared to 557.72 billion NGN in February). The increase in demand was however met by a slightly lower allocation compared to the February auction (the allocated amount was NGN 296.37 billion compared to NGN 297.39 in February). Consequently, there was a marginal drop in rates on both instruments to 10.15% and 12.70% respectively (from 10.95% and 13.00% in February).

One of the main causes of the strong demand for treasury instruments in the first quarter of 2022 was the high liquidity of the system. This limited investors’ bargaining power at primary market auctions, driving rates down. With the decline in system liquidity in the second quarter and the continuation of the upward trend in inflation, we note the likelihood that investors will demand higher rates. Thus, we anticipate a marginal rise in rates on the reopened instruments. We expect these factors to also influence the rate of the newly issued instrument.

In the secondary market, bond yields have trended higher since the last primary market auction, with the bond yield averaging 9.68% on April 14 (499 basis points above what it was at the last auction). With lower system liquidity and the likelihood of a rate hike in primary market auctions, we expect the bearish sentiment in the secondary market to persist in the near term.

Absolute and relative bond valuation

By evaluating the 13.53% FGN MAR 2025, FGN APR 2032 and 13.00% FGN JAN 2042 offers with the current yield curve as the basis for discounting, we arrived at the fair value, implied yield and interest rates. the following recommended offers for the instruments:

Proshare Nigeria Pvt.  ltd.

Our valuation gives a fair price excluding the coupon payment, the expected yield of the bond given its periodic interest payments and the expected yield of the periodic payments of the bond. We have analyzed the proposed issuances given the current yield environment, market liquidity, as well as a review of past past auctions, while also introducing the market sentiment factor into our assessment, on which we advise bid yield ranges for the two proposed issues.

Proshare Nigeria Pvt.  ltd.

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