CONFIDENTIAL

Dynamics of Investing in Eurobonds

Adeyemi Roberts, CFA Portfolio Manager 15 July 2020 What are Eurobonds?

Eurobonds are fixed-income debt instruments denominated in a different currency from that of the country or market in which it is issued

In the case of FGN 6.75% January 2021 , for example, it is a issued by the Federal Government of Nigeria in Nigeria but denominated in US Dollars. Those who buy it, buy in Dollars and the interest and principal repayment are also paid in US Dollars.

Simply put, Eurobonds are bonds that are issued in a currency other than that of the issuer. Features of Eurobonds

1

Credit Rating 6

Maturity Date Rate 2

EUROBOND

5 Face Value Price 3

Yield

4 Types of Eurobonds

• Fixed coupon rates • Variable Coupon rate with fixed redemption equal to a money market • Usually issued and reference rate plus a redeemed at face quoted spread. value • Benchmarks include LIBOR*, The US Treasury note rate, etc

STRAIGHT

Eurobonds can be grouped in four major categories:

CONVERTIBLES ZERO COUPON

• Can be converted to • Bond pays no interest equity shares at a but are issued at a predetermined price. discount • Conversion can be • Return to investor is done at certain times difference between during the bond life amount paid and and at the discretion of maturity value. the bondholder.

*LIBOR: London Interbank Offered Rate Key Drivers of Performance in Sub-Saharan Africa (SSA) Eurobonds

YIELD DIFFERENTIALS MARKET CONDITIONS Usually, the higher the yield Broader market conditions can have an differential between SSA Eurobonds impact on bonds. For example, optimism and developed market bonds, the about the health of the global economy and emerging markets, oil prices, general more demand SSA Eurobonds will see economic condition of the issuer and as investors make up a significant perceived ability to pay back affect portion of holdings. investor decisions to buy or sell Eurobonds

UNDERLYING CURRENCY TERM-TO-MATURITY If the underlying currency of the The age of a bond relative to its Eurobond depreciates relative to maturity date can affect pricing. This is other currencies, the Eurobond because the bondholder is paid the becomes less attractive to full face value of the bond when the investors and its price will likely bond reaches maturity. As the fall. maturity date gets closer, the bond's price will move towards the par value. Eurobonds in Sub-Saharan Africa

Currently, 21 countries in the region have outstanding sovereign eurobonds.

1990s. 2007 .. 2014 …2019/20 By end-2014, 17 countries had issued There was issuance from South The African eurobond story begins in eurobonds following record issuance Africa and the Mediterranean earnest when Ghana, Gabon and Republic that year coast. of Congo issued eurobond:

There was a pause in 2008 and 2009, but In 2015 Angola and Cameroon issued Seychelles had a debut issue in 2010 issuance picked-up and the asset sovereign eurobonds for the first time, class reached 10 countries. as did Mozambique in 2016

…2006 2008-2010 2015-2016 Heavyweight Middleweight Single Issuers Issuers Outstanding Issuance • South Africa • Ghana • Benin • Kenya • Angola • Republic of Congo • Nigeria • Senegal • Mozambique (also the three largest • Zambia • Rwanda economies on the (each with multiple • Tanzania continent) eurobonds) Eurobonds in Sub-Saharan Africa

Price Changes in Select 10-year SSA Eurobonds 140.00 121.14 120.00 100.88 99.83 97.14 97.68 100.00 85.21 83.63 86.24 80.00 64.70 60.00 54.38

38.02 40.00 33.03

20.00

- Kenya Nigeria Angola Zambia Ghana Senegal

Lowest Price in H1 2020 30-Jun-20

• Prices of most of the Sub-Saharan Eurobonds fell dramatically attributable to the ongoing Coronavirus Pandemic • Zambia recorded the lowest price with very little increase within the quarter making it the worst performing in Sub Saharan Africa. • On the other hand, Angola recorded the highest q/q increase in price making it the best performing Eurobond in SSA. Eurobonds in Nigeria

Price Changes in Select Nigeria Eurobonds 120 104.83 103.326 102.598 98.818 101.648 100.879 100 92.68 89.365 90.28 79.234 80 64.7 60.676 60

40

20

0 ACCESS 10.5% 19/10/2021 ETINL 9.5% 18/04/2024 FIDBAN 10.5% 16/10/2022 NGERIA 6.275% 12/07/2023 NGERIA 8.747% 21/11/2031 NGERIA 7.625 Nov 2047

Lowest Price in H1 2020 30-Jun-20

Source: Bloomberg, Debt Management Office

• Currently, there are 11 outstanding Eurobonds issued by the FGN and 6 Eurobonds issued by Corporates (mainly banks). • Sovereign Eurobonds typically experience more significant price moves • While the risks of corona virus still remains, foreign investors looking for yields are expected to come into the Nigerian market in search of higher yield Benefits and Constraints of Eurobonds

Benefits Constraints

Diversification Minimum Trade size

Market Risk Fixed Coupon Payments

Trading Opportunities Concentration risk CONFIDENTIAL

Thank you

FBNQuest 10, 16 – 18 Keffi Street, off Awolowo Road, S/W Ikoyi, Lagos, Nigeria Tel: +234 (1) 2702290-4, +234 (0) 708 065 3100 www.fbnquest.com An FBN Holdings Company