FG August N135 Billion Bond Fails with 41.5% Subscription

Kunle Aderinokun

The federal government’s N135 billion bonds issued by the Debt Management Office in August was 41.5 per cent subscribed as the agency could only raise N56.05 billion from the auction. The latest auction reflects a poor outing not experienced in the market in a very long time and is a sharp contrast to the January auction, where the bonds were sold at slightly higher rates but raised a total of N215 billion, 165.3 per cent of the amount that was on offer.

The auction for the N135 billion bonds, which proceeds the federal government plans to finance part of the deficit in the 2017 budget opened on August 23 and closed on August 25, 2017.

The bonds, floated in three tranches of N35 billion FGN Bonds, N50 billion FGN Bonds and N50 FBN Bonds were sold at 14.5 per cent, 16.2884 per cent and 16.2499 per cent respectively. They, respectively, have 5-year (July 15, 2021), 10-Year (March 17, 2027), and 20-Year (April 18, 2037) maturities.

The bond auction coincided with the open market operation (OMO) of the Central Bank of Nigeria and an FX auction also conducted by the apex bank. A total of N171billon in OMO bills was sold by CBN on Monday, August 21; Tuesday, August 22 and Wednesday, August 23 – all in the same week the DMO (Wednesday) auction failed.

The poor subscription to the bonds might not be unconnected with investors’ preference for the 1-year tenor OMO bills, which were more attractive at 18.549 per cent than the bonds that were sold at the rate of 16.80 per cent of at least 5-year tenor.

Besides, market sources reasoned that, “When you consider that over N200 billion of OMO bills were sold in the prior week, then one might argue that CBN took all the money from the system so nothing was left for the bond auction.”

“Even if they had taken all the money offered at the maximum bid rate, they would have raised only N63.65 billion, a 47.1 per cent success rate. This abysmal level of interest has not been seen in a few years,” a treasurer lamented.

The results of the CBN OMO auction revealed that, a total of N171.072 billion worth of treasury bills were sold, broken down into N51.929 billion sold on August 21; N60.866 billion sold on August 22 and N58.277 billion sold on August 23.
An industry source, who is a dealer in one of the major banks, noted: “With the 1-year tenor OMO selling for a discount rate of 18.549 per cent, this is actually a true yield of 22.60 per cent. With risk free 1-year rates at that level, there is no way long term bonds can sell in large volumes at 16.9 per cent yield. This inverted yield curve has been with us for over a year and shows no signs of normalising.”

On concerns raised on budget deficit financing, Director, Union Capital Ltd, Egie Akpata, reasoned that, “The low subscription levels of the August DMO bond auction were very unusual and so it is premature to say if it will have any impact on the FGN budget deficit funding.”

Cautioning that, “If we should have another month of such low performance this year, then a few more questions might need to be asked.” Akpata, however, allayed the fears that the bond failure has left the government with scarce resources. “It is worth noting that in the January bond auction, DMO took up N215 billion as against an initial plan of N130 billion so there is some room to have sub par auctions and still raise the funds to finance the budget deficit.”

The director, who is a capital market operator, acknowledged that, “The CBN has successfully stabilised the exchange rate and is bringing down inflation by maintaining very tight liquidity conditions.” He, however, cautioned that, “Any deviation from that script could easily send the naira into a free fall, inflation could rise and the economy fall back into recession.”

“However, it is very likely that this laser focus on liquidity management starved the August DMO bond auction of much needed demand. I would expect to see better coordination between the CBN and DMO around future auctions. At least now the FGN/DMO knows what other bond issuers face trying to issue long term debt into a market where CBN is paying up to 22.6 per cent for 1 year risk treasury bills,” he added.