Nigeria's Zenith Bank issued $500 million in 5-year senior unsecured Eurobonds at a yield of 6.5 percent on Thursday, sources said.
The Zenith Bank bond received orders worth $1.3 billion for its new $500 million five-year bond issue, which priced on Thursday at a yield of 6.5 percent.
Allocation statistics showed that United States investors took 44 percent, Europe, 9 percent, Nigeria 6 percent, while others share the remaining 6 percent.
A breakdown of the issue by investor type also showed fund managers bids for 74 percent, banks 15 percent, hedge funds 9 percent, insurance and pension funds 2 percent.
. Below is Samir Gadio, head of research at South Africa's Standard Bank's view on the issue:
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• Zenith Bank issues debut USD
bond. Yesterday (10 April), Zenith Bank sold USD500m in 5-y senior
unsecured Eurobonds which pay a coupon of 6.25%. We suspect the proceeds will
serve to finance the power sector, oil and gas and other project loans.
Meanwhile, the yield at inception was 6.5%, slightly below the high 6% area
initially announced, and the equivalent z-spread over UST 485 bps. The bank
appears to have taken advantage of a favourable window of opportunity in
global capital markets characterised by a further compression in emerging market
Eurobond spreads (EMBI+ spread at 314 bps on 10 April vs a yearly high of 397
bps on 3 Feb) and a move lower in US Treasury rates earlier this month (5-y
at 1.59% on 10 April vs 1.79% on 3 April). In such a bullish context, the
typical demand-supply mismatch for African USD fixed income assets and
especially corporate Eurobonds assisted the sale. Furthermore, the stronger
NGN (160.8 on 10 April) in recent days may have also eased foreign investor
concerns about the bank’s exposure to FX risk.
• Allocation dominated by
offshore accounts. The order book amounted to USD1.3bn which
represents a decent oversubscription, with US, UK and European investors
accounting for 44%, 35% and 9% of the allocation. In terms of investor type,
fund managers dominated (74%), followed by banks and private banks (15%),
hedge funds (9%) and insurance and pension funds (2%). Interestingly,
Nigerian entities only represented 6% of the
allocation, which is rather low compared to previous Nigerian corporate
Eurobond issuances. Because Nigerian financial institutions need to match USD
assets and liabilities and since a USD Eurobond is a natural hedge against
any future NGN weakness (despite the stronger performance of the currency
lately), we suspect onshore accounts will probably get involved at a later
stage in the secondary market. The domestic bid will gradually squeeze
supply, as has been the case with other Nigerian corporate Eurobonds.
• Zenith Bank 19s vs Nigerian
sovereign and corporate Eurobonds. This pricing implies a
spread differential of 215 bps with the Nigeria 18s and 47 bps with the GTB
18s. It is consistent with our expectation that the Zenith Bank 19s would be
placed wide to the GTB 18s (spread of 438 bps), but tight to the Access Bank
17s (556 bps) and Fidelity Bank 18s (674 bps).
• Fairly valued; still likely
to gain modestly. We estimate theoretical fair value for the
Zenith Bank 19s at 6.5-6.625% in the primary market, and as such the bond
appears to be appropriately priced. Given the likely domestic appetite for
the issue in the secondary market - on top of the offshore bid -, further
moderate yield compression looks probable, assuming that favourable external
risk metrics persist in the credit market in the near term and push Nigerian
Eurobond yields slightly lower. Yet we are steadily converging to the floor
for emerging market and Nigerian Eurobond spreads given the scale of the
recent rally. With a size of USD500m, the Zenith Bank 19s should also be
eligible for CEMBI Broad inclusion (the threshold is USD300m), which should
support the instrument.
• Lower rating outlook largely
unnoticed. Even though S&P recently revised the outlook on Zenith
Bank’s BB- long-term foreign currency rating to Negative from Stable, the
adjustment also applied to four other banks and follows a previous revision
of the outlook on the rating of the sovereign (to BB- Negative, from BB-
Stable). As such, this move does not reflect a specific deterioration in
Zenith Bank’s fundamentals. Besides, the bank is rated one notch lower by
Fitch, at B+ with Stable Outlook (Fitch also assigned a B+ rating to Zenith
Bank’s Global Medium Term Note Programme). In any case, there was limited
market reaction to the change in the sovereign rating outlook by S&P, as
illustrated by the positive performance of Nigerian Eurobonds amid a
favourable global risk environment in recent weeks.
• Market perception. The
appointment of the outgoing CEO of Zenith Bank, Godwin Emefiele, as next CBN
Governor, may have also boosted the momentum for the bond issue. While the
CBN leadership factor possibly shaped and influenced the market perception of
the Zenith Bank Eurobond, there is however no scope to suggest any implicit
or explicit institutional support for the 19s.
• Snapshot of Zenith Bank. Zenith
Bank is a Tier-I bank in Nigeria, and the second largest by assets, loan book
and deposits in the country. ROTE declined slightly to 19.6% in FY13
from 23.9% in FY12. Also, the cost to income ratio
rose marginally to 56% from 55% in the same time frame, but was
well below the industry average (65%). The asset quality trend remained positive,
with the NPL ratio declining to 2.9% from 3.2% in FY12, while the cost of
risk stabilised around 0.9%. For further analytical insights about
Zenith Bank, please refer to the recent results review released by our Equity
Research team (Zenith Bank Plc: Still looks a good bet [18 March 2014]).
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