Nigerian Eurobonds - Key Contractual Terms and Considerations for Investors

The possibility that a sovereign will default on its sovereign debt or will seek to restructure its sovereign debt to forestall the occurrence of a sovereign default, despite a perception of creditworthiness, is a very real one. When either of such events occurs, the best protection for investors can often be a function of the contractual framework underpinning a Eurobond issuance as well as the legal framework governing the issuance of Sovereign Bonds. This legal update highlights some of the standard contractual terms that characterize Eurobonds issued by Nigeria[1].

1. Security in Nigerian Eurobonds

Nigerian Eurobonds are typically issued without any security or collateral[2] and are often expressed to be a category of External Indebtedness[3], which is general, unsecured, unconditional, unsubordinated, and backed by a pledge of the full faith and credit of Nigeria.

2. Collective Action Clauses in Nigerian Eurobonds

Collective Action Clauses ("CACs") have now become a standard fixture in Nigerian Eurobonds offerings. Consistent with international practice in this area, the objective of including CACs in Eurobonds is to manage coordination and “holdout creditor” issues towards ensuring an orderly debt restructuring process.

Nigeria’s version of the CAC gives Nigeria the contractual rights to amend the due dates and amounts of the principal and interest payable on its Eurobonds, as well as a list of other reserved matters, upon the approval of more than 75% of the aggregate amount of outstanding holders.

Such “reserved” matters may typically include the right to change the currency in which any applicable interest, premium, or principal is payable, as well as the right to change the governing law of securities issued following a debt restructuring[4].

3. Negative Pledges in Nigerian Eurobonds

Nigerian Eurobonds typically bear a Negative Pledge clause. The clause essentially places a contractual obligation on Nigeria, to not create any security ( except for "permitted securities") over any part of whole of its present and future assets, undertaking and revenues, for the purpose of securing any of the country’s External Indebtedness or any guarantees in respect of such External Indebtedness, without at the same time, securing the relevant Nigerian Eurobond, equally and rateably.

4. Governing Law of Nigerian Eurobonds

With the exception of the law authorizing the relevant Eurobond offering, which would typically be Nigerian law, Nigerian Eurobonds (as well as other material agreements[5]) are typically governed by either New York law or English Law.

5. Parri Passu Ranking of EuroBonds in Nigeria

Nigerian Eurobonds are typically expressed to rank without any preference among the Eurobonds in issue and equally with all other unsubordinated External Indebtedness. Typically, the pari passu provisions are often expressed so as not to require Nigeria to make payments under the relevant Eurobonds rateably with payments being made under any other External Indebtedness.

6. Waiver of Sovereign Immunity in Nigerian Eurobonds

Nigerian Eurobonds typically bear a limited waiver of sovereignty. Generally, the waiver of sovereignty clause allows investors to take legal action against Nigeria in foreign courts in connection with the relevant Eurobond issuance.

With respect to the United States, such submission to jurisdiction will typically be an express submission to the jurisdiction of any state or federal court in the Borough of Manhattan in the City of New York, and with respect to the United Kingdom, English courts, generally.

It is also not uncommon for Nigerian Eurobonds to contain an express waiver of the defense of an inconvenient forum or any defense on the grounds of venue. Nigeria will typically not waive its sovereign immunity with respect to: (a) actions arising out of or based on United States federal or state securities laws[6] or (b) actions relating to any execution or attachment in respect of (i) property, including any bank account, used by a diplomatic or consular mission of Nigeria or its special missions or delegations to international organizations (ii) property of a military character and under the control of a military authority or defense agency of Nigeria or (iii) property located in the Federal Republic of Nigeria and dedicated to a public or governmental use by Nigeria, excluding property used for commercial purposes.

Comments

There are no indications that Nigeria is nearing a sovereign debt default, as Nigeria's Debt-to-GDP ratio still falls within IMF parameters. Nigeria fully redeemed a 5-year 300 million Diaspora Bond in June 2022 and redeemed another $500 million Eurobond in 2021.  We also expect that the international capital markets will respond positively to the removal of petroleum subsidies, a policy change which the President-Elect has committed to implement.  However, following sovereign defaults in Ghana and Zambia, there is some speculation that many more African countries will seek to restructure their debt.  Just before the general elections in February 2023, Moody's downgraded Nigeria to Caa1 (S&P and Fitch are on B-). Based on information from its public debt manager, Nigeria's public debt, which stood at N46.25 trillion ($103.11 billion) as of December 31, 2022, is expected to rise to N77 trillion by May 2023, on account of the computation of the ways and means debt, which the Federal Government owes its Central Bank.

[1] Nigeria is, relatively, an early entrant into the international capital markets. These contractual terms haven’t been tested in Nigerian courts or in foreign courts within the context of Eurobonds issued by Nigeria.

[2] In practice, it is possible to secure bond issuances on the back of specific tax revenues or assets of a sovereign. Such additional security can often reflect the level of risk associated with an issuer.

[3] "External Indebtedness” is typically expressed in terms of any “Indebtedness” which is payable by its terms or at the option of its holder in any currency other than the currency of Nigeria.  “Indebtedness” is often expressed as any obligation (whether present or future) for the payment or repayment of money which has been borrowed or raised (including money raised by acceptances and leasing.

[4] With respect to legal opinions or actions, a bond-by-bond review of the exact wording and scope of a CAC is often necessary.

[5] Typically, the Fiscal Agency Agreement.

[6] This means that it will generally not be possible to obtain a judgment in the United States against Nigeria unless the relevant United States court determines that Nigeria is not entitled to sovereign immunity with respect to such actions.

This legal update is not intended to be taken as legal advice. Please seek professional legal advice specific to your situation. For more information or consultation regarding the content of this article, please reach out to the undersigned or to your usual Balogun Harold.