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Nigerian decision baffles investors


- Päivi Munter

(Thursday, January 13, 2005)

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"There is no reason for them not to pay this," said Richard Segal, director of research at Exotix. "The amount is small and the government's finances are very strong."


Nigeria has failed to make an estimated $30m payment on its restructured commercial debt, even as the oil-rich country enjoys windfall revenues from high commodity prices. Market participants in London said on Tuesday the government had on November 15 missed a payment on so-called bar bond warrants, debt securities that become payable when the price for oil, Nigeria's main export, exceeds a given level.

The warrants were issued as part of Nigeria's London Club debt restructuring in 1992, aimed at improving the attractiveness of the deal to investors in exchange for below-market rates on the actual restructured bonds. Investors said they were nonplussed at Nigeria's failure to make the payment. "There is no reason for them not to pay this," said Richard Segal, director of research at Exotix. "The amount is small and the government's finances are very strong." The Nigerian central bank's foreign exchange reserves rose to a record high of $16.14bn by the end of October, up from $7.1bn a year earlier. The economy is growing at a rate of about 4.5 per cent a year.

Julian Adams, chief executive officer of UK fund manager Convivo Capital, said the payment failure contrasted with Nigeria's previous track record in servicing the restructured debt. "Having honoured the restructured London Club debt for more than 10 years, it is hard to understand why Nigeria is now failing to pay," Mr Adams said. Nigeria's debt management office, which handles foreign debt payments, did not return calls. Citigroup, which acts as the government's payment agent on the warrants, declined to comment.

The warrants become payable twice a year if the average price of the Nigerian Bonny Light crude oil exceeds $30 per barrel in the six months to the payment date. The sought-after blend, which trades at a premium to the North Sea Brent benchmark, averaged nearly $42 per barrel in the six months to November 15, calling for the maximum $15 payment for each warrant.

Nigeria is an unrated sovereign, whose intermittent political instability has kept it out of international capital markets since the debt restructuring in 1992. Investors said it therefore appeared to have little to lose from missing a small debt payment. "This is an example of what governments can get away with," Mr Segal at Exotix said. "The amount is too small for a major investor to kick up a fuss over." However, as the Paris Club of sovereign creditors gathers for a high-level meeting today in the French capital to discuss a payment moratorium for the countries affected by the Asian tsunami, Nigeria is thought to be seeking talks on a reduction of its bilateral debt.

A source close to the creditor group said Ngozi Okonjo-Iweala, Nigeria's finance minister, was expected to meet with the management of the group today.

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