Most Eurobonds redeem at maturity when the issuer pays the last coupon and returns 100% of the principal to the investor. A simple structure like this is called a “bullet structure”. Other popular structures can have embedded options such as call/put options, a sinking fund or a convertible structure.
A current overview of the structures all Nigerian Eurobonds have is provided below.
A bullet bond does not have an embedded option. The only way an issuer can possibly change the structure of the bond (the amount outstanding for example) is through a corporate action. An issuer can buy back (part of) their bond in the secondary market through a tender. Corporate actions and tenders will be discussed later in this guide
Some bonds are issued with a call option embedded in the structure. Such an option allows the issuer to call back the entire Eurobond at a fixed date and price. Callable bonds with a ‘soft call schedule’ give the issuer more flexibility on the date and price. For example, multiple call dates and call prices could be part of a soft call schedule.
A call option is an advantage to the issuer and is usually exercised when the issuer believes it can refinance cheaper at the moment of the call date. In other words, market rates have dropped compared to the coupon rate. For an investor, this imposes a reinvestment risk prior to the maturity date of the bond and therefore is a disadvantage. Issuers usually pay a premium call price in order to partially compensate the investor.
Currently in Nigeria, the only callable bond is issued by Seplat Petroleum which matures in April 2023. It should be noted that Access Bank, First Bank of Nigeria and Ecobank Nigeria have all issued callable bonds in the past.
The April 2023 Seplat Petroleum Eurobond has the below soft call schedule, where the issuer can call back the bond at three specific dates and at three different fixed prices.
Sinkable bonds are bonds that pay back a portion of the total principal before their maturity date. It is said that the bond “sinks”. Usually the issuer provides a clear schedule when it pays back that portion. A sinking fund is usually held in escrow and will be tapped to repay the principal when the sinking schedule kicks in.
Sinkable bonds are hardly issued by non-sovereign issuers. Although, Nigeria has no outstanding sinkable Eurobonds at present, it is a popular structure for other sub-Sahara African sovereign issuers. Out of the 61 currently outstanding sub-Saharan Africa sovereign Eurobonds, 30 are sinkable. An illustration of sub-Saharan Africa countries that have issued sinkable bonds is presented below.
Countries: Benin (1), Cameroon (1), Republic of Congo (1), Gabon (2), Ghana (11), Côte d’Ivoire (7), Kenya (2), Mozambique (1), Senegal (3), Zambia (1).
A (sovereign) issuer of a diaspora bond aims to target citizens of that country who are living abroad. Currently Nigeria has one outstanding Diaspora Eurobond.
The June 2022 Nigerian government bond was issued to appeal to Nigerians living abroad, i.e. the Nigerian diaspora. One of the key features of Nigeria’s diaspora bond is that the minimum amount that can be invested in the diaspora bond is $2,000 nominal. In comparison to $200,000 nominal for all other Nigerian Eurobonds. Officially the Diaspora bond cannot be defined as a Eurobond, however for the sake of simplicity we have done so in this guide.
The low minimum nominal threshold compares to Fractional Bonds. Please visit the Fractional Bonds section to find out more.