Zenith Bank issues USD500m Eurobond at 6.5%
Samir Gadio and Ayomide Mejabi, Standard Bank
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]).