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The return of Nigerian banks to the international bond markets marks a small step towards reducing maturity mismatches between foreign-currency (FC) assets and liabilities, Fitch Ratings says.
According to the New York based credit ratings agency, the return is credit positive as it reduces foreign currency risk, although the impact will be modest as the new bond issuances are small relative to total term FC lending.
“Renewed interest from international investors seeking yield has enabled several banks to issue Eurobonds since late 2016, for the first time since 2014, albeit at higher yields following rating downgrades in the intervening period. In most cases, the issuance will boost FC funding rather than simply refinance maturing FC debt. Nigerian banks have traditionally operated with significant maturity gaps, funding longer-term loans with short-term customer deposits, as is the case in many emerging markets. For FC liquidity, there are no prudential limits in place. The Central Bank of Nigeria’s regulatory liquidity ratio (requiring banks to hold liquid assets equivalent to 30% of total deposits) is focused exclusively on naira liquidity,” Fitch Ratings said in a statement issued this morning.
The agency estimates that about half of all bank loans are medium-term with maturities of three to four years, largely in foreign currencies.
“This is a high share for a low-rated market where banks have limited access to longer-term FC funding. FC term loans underwent considerable restructuring last year and this year, particularly among oil-related borrowers facing cash flow constraints given weak oil prices and disruptions in production,” the statement read.
