DEBT: Nigeria's Diaspora debut struggles in the secondary

Nigeria's Diaspora bond tumbled on the break as a combination of falling oil prices, sub-benchmark size and new format sent investors scurrying.
The US$300m five-year priced at par to yield 5.625 percent on Monday. But it fell by nearly 2.5 points in the secondary, pushing the yield up to 6 percent.
One trader said the small deal met a "lukewarm reception" and triggered "a wave of risk aversion across the [sub-Saharan Africa] space".
Leads cited violent moves in the oil price for the poor performance. Brent hit its lowest level since November, with the price of a barrel of crude quoted at US$45.
But rivals were also confused by certain aspects of the trade, including who the target audience was. The bond could be marketed to not just Nigerian expats but also "friends of Nigeria" as the DMO calls them.
A banker familiar with the deal said the two unique features were the small US$2,000 minimum denominations designed to attract retail investors, and that the documentation was issued under New York rather than English law.
"In every other aspect this will be similar to a regular new issue for Nigeria," he said.
The deal was not unexpected. Finance ministry sources had suggested in January that Nigeria (B1/B/B+) would seek to issue a Diaspora bond by March. That deadline was missed but the government was still keen to get the idea off the ground.
Given the deal's novelty, the sovereign sought to keep the size small, with the US$300m target flagged from the outset. That was an issue for some institutional investors as the bonds are not index-eligible.
The leads began marketing the June 2022 notes at 5.75 percent area, equivalent to about 394bp over mid-swaps. The sovereign's US$500m 6.375 percent 2023s were trading at a Z-spread of 392bp. Meanwhile, its US$500m 6.75 percent 2021s were at plus 333bp.
That put fair value at around plus 366bp based on an interpolation of the curve.
Investors had mixed views at IPTs. "Nigeria looks really tight. It is a small size as well, below benchmark-size," said Delphine Arrighi, a fund manager at Old Mutual Global Investors.
Uday Patnaik, head of emerging markets debt at L&G Investment Management, said: "At price talk around 5.75% the new issue is priced attractively. This issue is meant more for the locals. That said, we are looking to participate."
At the first update, the order book was more than US$550m, with pricing unchanged at 5.75 percent area. The deal then launched and priced at 5.625 percent. But once free to trade, notes jumped to above 6 percent.
Rival bankers were perplexed by what happened. While one thought the pricing was probably correct, some other aspects of the deal confused him. "I have no idea what's going on here - US$300m from a [US$550m] book. Why wasn't the book bigger?"
Leads said the trade fell victim to falling oil prices. Brent has been weaker for the past month, down nearly US$10 since May 23.
African credits across the board have been struggling, with Ivory Coast's recently issued 2033s trading with a 96 handle, for example.
But the oil backdrop wasn't too weak to prevent Nigeria from going ahead with the deal in the first place. Moreover, oil-dependent Russia's new issue was wrapped around reoffer after pricing on Tuesday.
Another banker familiar with the deal said the performance was down to it being the first of its kind in sub-Saharan Africa. "It was their first time doing it. Innovations always take some time to land," he said.
Nigeria first announced plans to sell Diaspora bonds in 2013 to raise between US$100m and US$300m, but the government at the time could not finish appointing book runners for the sale before an election that swept the opposition into office.
Nigeria is in its first recession in 25 years and needs to find money to make up for shortfalls in its budget. Low prices for crude oil and militant attacks in its crude-producing heartland, the Niger Delta, have slashed its oil revenues.
Bank of America Merrill Lynch, First Bank of Nigeria, Standard Bank and United Bank of Nigeria were the leads.