In an economic climate where the Naira is facing continued depreciation, Nigerians are increasingly seeking ways to protect and grow their wealth.
One of the more attractive investment options is Eurobonds—international bonds issued in a currency different from the issuer’s local currency, like the naira.
For Nigerian investors, these bonds are typically issued in U.S. dollars, offering a hedge against local currency risks.
High-Yield Nigerian Eurobonds
Eurobonds have become a popular investment vehicle for Nigerians who want to safeguard their assets from the volatility of the Naira while earning returns in a stable currency like the U.S. dollar.
But what makes them even more appealing is the potential for significant tax-free earnings, particularly from bonds with higher yields.
As of August 8, 2024, several Nigerian Eurobonds are offering yields above 9%, making them incredibly attractive to investors.
Let’s take a closer look at these bonds, which not only provide substantial returns but also ensure that these earnings are tax-free:
1. 6.500% US$1.5BN NOV 2027 Eurobond
- Current Price: $90.813
- Current Yield: 9.662%
- Yield at Issue: 6.500%
2. 6.125% US$1.25BN SEP 2028 Eurobond
- Current Price: $86.961
- Current Yield: 9.928%
- Yield at Issue: 6.125%
3. 9.248% US$750M JAN 2049 Eurobond
- Current Price: $84.530
- Current Yield: 11.035%
- Yield at Issue: 9.248%
4. 7.696% US$1.25BN FEB 2038 Eurobond
- Current Price: $75.721
- Current Yield: 11.135%
- Yield at Issue: 7.696%
These four bonds are particularly noteworthy because they offer yields significantly higher than the rate at which they were issued.
For instance, the 9.248% US$750M JAN 2049 Eurobond currently yields 11.035%, a sizable jump from its original issue yield of 9.248%.
This means that for every $10,000 invested in this bond, an investor can expect to earn $1,103.50 annually, completely tax-free.
Calculating Your Potential Earnings
Let’s break down how much you could earn with a $10,000 investment in these high-yield Eurobonds:
- 6.500% US$1.5BN NOV 2027 Eurobond: A yield of 9.662% would generate $966.20 annually.
- 6.125% US$1.25BN SEP 2028 Eurobond: A yield of 9.928% would generate $992.80 annually.
- 9.248% US$750M JAN 2049 Eurobond: A yield of 11.035% would generate $1,103.50 annually.
- 7.696% US$1.25BN FEB 2038 Eurobond: A yield of 11.135% would generate $1,113.50 annually.
With returns like these, it’s clear why these Eurobonds are an attractive option for Nigerian investors looking to earn significant, tax-free income while protecting themselves from local currency depreciation.
Breaking Down the Key Terms: Bond Price, Yield, and Coupon
To better understand why these bonds are such a great investment, it’s important to grasp a few basic terms: bond price, yield, and coupon.
Bond Price: This is the amount of money you pay to buy the bond. Bond prices can fluctuate based on market conditions.
- For example, the 6.500% US$1.5BN NOV 2027 Eurobond is currently priced at $90.813.
- This means you can buy it for $90.813 even though its face value (the amount you’ll get back when the bond matures) is $100.
Yield: The yield is the return you earn on your bond investment. It’s expressed as a percentage and depends on the bond’s current price.
- If you buy a bond at a price lower than its face value, like the 6.125% US$1.25BN SEP 2028 Eurobond which is currently priced at $86.961, your yield will be higher than the bond’s coupon rate because you’re paying less for the bond but still receiving the same fixed interest payments.
Coupon: The coupon is the fixed interest rate that the bond pays each year, based on its face value.
- For example, the 9.248% US$750M JAN 2049 Eurobond pays 9.248% of its face value annually.
- This means if the face value is $100, you’ll receive $9.248 each year, regardless of the bond’s current market price.
Holding a Bond to Maturity vs. Selling It Early
When investing in bonds, you have two main options: holding the bond until it matures or selling it before maturity.
Holding to Maturity: If you hold a bond to maturity, you will receive the bond’s face value when it matures, along with the regular interest payments (the coupon) throughout the bond’s life.
- For instance, if you buy the 7.696% US$1.25BN FEB 2038 Eurobond at $75.721 and hold it until 2038, you’ll get back the full $100 face value, plus the regular interest payments every year.
Selling Early: If you decide to sell the bond before it matures, the price you get will depend on the market conditions at that time.
- If interest rates have gone down, the bond price might be higher than what you paid, allowing you to sell at a profit.
- However, if interest rates have risen, the bond’s price might be lower, potentially resulting in a loss.
Why These Bonds Are a Smart Investment
Investing in high-yield Eurobonds like these is a strategic move for several reasons:
Currency Diversification: By investing in U.S. dollar-denominated assets, Nigerian investors can protect themselves from the volatility and depreciation of the Naira.
Higher Returns: With yields surpassing 9%, these bonds offer returns that far exceed what you might find with local investments. This makes them particularly appealing for those looking to maximize their income without taking on excessive risk.
Tax Efficiency: The earnings from these Eurobonds are tax-free, providing a significant advantage compared to other investment options that may be subject to local taxation.
Stability: U.S. dollar-denominated bonds tend to be more stable than Naira-denominated assets, reducing the overall risk in an investor’s portfolio.
Potential Risks Involved in Investing in Eurobonds
While Eurobonds offer attractive returns, it’s essential to be aware of the potential risks:
Interest Rate Risk: The value of bonds tends to decrease when interest rates rise meaning thats if you need to sell your bond before maturity, you could sell it for less than you paid, leading to a loss.
For example, if you purchase a bond and interest rates later increase, the bond’s price might drop, meaning you would lose money if you sold it early.
Credit Risk: There’s always a risk that the bond issuer (in this case, the Nigerian government) might default on its payments. While this risk is generally low for sovereign bonds like these, it’s still a possibility that investors should consider. We have also seen a default occur in Ghana and some other African countries.
Currency Risk: Although these bonds are issued in U.S. dollars, currency fluctuations can still impact your returns, especially if you need to convert your earnings back into Naira. If the Naira strengthens significantly against the U.S. dollar, your returns might be worth less in local currency terms.
Liquidity Risk: Not all bonds are easily sold on the secondary market, thus if you need to sell a bond before maturity, there might not be a ready buyer, or you might have to sell at a lower price than you anticipated.
In the face of a weakening Naira, diversifying into U.S. dollar-denominated Eurobonds can be a smart financial move. The high yields currently offered by several Nigerian Eurobonds present an opportunity to earn substantial, tax-free income while minimizing currency risk.
Other Eurobonds with above 10% yields
8.375% US$1.25BN MAR 2029 Eurobond
- Current Price: $93.008
- Current Yield: 10.191%
- Yield at Issue: 8.375%
7.143% US$1.25BN FEB 2030 Eurobond
- Current Price: $86.306
- Current Yield: 10.357%
- Yield at Issue: 7.143%
8.747% US$1.0BN JAN 2031 Eurobond
- Current Price: $91.475
- Current Yield: 10.505%
- Yield at Issue: 8.747%
7.875% US$1.5BN FEB 2032 Eurobond
- Current Price: $84.721
- Current Yield: 10.809%
- Yield at Issue: 7.875%
7.375% US$1.5BN SEP 2033 Eurobond
- Current Price: $79.781
- Current Yield: 10.843%
- Yield at Issue: 7.375%