LATEST UPDATES
Card-image-cap

Market | Bonds & Fixed Income

Ahead of FGN Bond Auction Scheduled for December 12th, 2022

Dec 11, 2022   •   by Proshare Research   •   Source: Proshare   •   eye-icon 227 views

Issue on Offer/Summary 

The Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will be conducting a bond auction on Monday, 12 th December 2022. The total amount on offer is expected to be between NGN210bn and NGN240bn from three issues. The instruments include three re-opening issues (Apr 2029, Apr 2032, and Apr 2037). 

 

14.55% FGN APR 2029 NGN70bn – NGN80bn 

12.50% FGN APR 2032 NGN70bn – NGN80bn 

16.25% FGN APR 2037 NGN70bn – NGN80bn 

 

Current Yield Analysis 

At the Primary Market Auction (PMA) held in November, demand for the instruments increased significantly compared to the auction in October. Specifically, November’s total subscription (NGN344bn) more than doubled October’s figure (NGN119.18bn). The increase in subscriptions was primarily driven by the robust system liquidity, owing to the coupon payments (NGN189.52bn) at the end of October. Similarly, the total allotment increased by 149.50% MoM to NGN269.16bn (vs NGN107.88bn at the previous auction). As such, the total bid-to-cover ratio was 1.28x (vs 1.10x in October), signifying higher investor demand for the FGN bonds at the PMA. The investors’ demand, especially for higher incentives to reflect the current market realities, influenced the Government’s decision to offer higher rates at the auction. Consequently, the marginal rates on the trio instruments increased by 25bps, 20bps, and 20bps to 14.75%, 15.20% and 16.20%, respectively. 

 

In the forthcoming auction, we anticipate a marginal decline in rates on the instruments. This is primarily premised on robust system liquidity – evinced by lower average interbank rates (13.88% vs 15.58% as at the last auction) – that could prompt higher demand for the instruments. Taking a cue from the latest Nigerian Treasury Bills auction, a notable spike in demand for the instruments forced a moderation in the stop rates across all instruments. Also, we consider the Government’s effort to manage its borrowing costs as a factor that supports our expectation. 

 

In the secondary market, the sentiment has mainly been bullish since the previous auction, with an average bond yield of 14.09% as of 9th December (38bps lower than the last auction date). For the rest of the year, we expect the sentiment to persist owing to continued buying activities from investors – especially those unable to get the instruments at the PMA.

 

Please see the table below for our recommended bid rates based on our analysis of the current yield environment. 

 

Bond Absolute and Relative Valuation 

In valuing the 14.55% FGN APR 2029, 12.50% FGN APR 2032 and 16.25% FGN APR 2037 offers with the current yield curve as the basis for discounting, we arrived at the following fair value, implied yield, and advised bid rates for the instruments: 

 


Our valuation gives a fair-trading price ex coupon payment, the expected return on the bond considering its periodic interest payments and the expected return on the bond’s periodic payments. In addition, we analysed the issues on offer given the current yield environment and market liquidity, as well as a review of the recent past auctions, whilst also introducing market sentiment factor into our valuation, on which we advise bid yield ranges for both issues on offer.

Related items.

Get the App

apple-store  play-store

Connect with us


Proshare is a professional practice focused on delivering research and information services to bridge the gap between investors and markets; by delivery on credible, reliable, and timely engagements through the following areas — Impact Research, Market Intelligence, Strategic Advisory, Stakeholder Relations & Digital Media.