By Obinna Chima, 09.26.2010

The Central Bank of Nigeria (CBN) has pegged the maximum investment a bank can make in any state government bond at 10 per cent of the total amount outstanding of that bond issue.

 

 

It has also directed that banks’ portfolio in any state government bond shall not exceed 30 per cent of the former’s total portfolio in debt securities.

 

 

These developments, according to the apex bank in a circular titled, “Guidelines for Granting Liquid Asset Status to State Government Bonds,” on its website yesterday, was to confer liquid asset status on eligible state government bonds in accordance with the CBN Act (2007).

 

 

The banking watchdog also pegged the maximum maturity tenor of the fixed income instrument at seven years for such bonds to be regarded as liquid asset. Lately, there has been a scramble by several state governments to raise funds via the seemingly attractive bond market.

 

 

The CBN listed the debt securities to include treasury bills, Federal Government of Nigeria (FGN) bonds, FGN-guaranteed notes, sovereign debt notes and any other Nigerian sovereign debt securities. Also included were CBN Bills, Bonds Collateralised with FGN bonds, state government bonds, state government agencies’ bonds, corporate bonds and dated preference shares.

 

 

The banking sector watchdog further warned: “The underwritten positions of state bonds shall not be regarded as investments and therefore will not be counted in determining these limits. However, a monthly return on the underwritten positions and the sell-off strategy shall be rendered to the Banking Supervision Department of CBN.

 

 

“Until such time that the Nigerian State bond market presents banks and discount houses with the opportunity of having trading books in State bonds, all State bond holdings shall be classified as investments, that is Available-For-Sale (AFS) and/or Held- To-Maturity (HTM) for the purpose of CBN reporting.”

 

 

The apex bank said any state government that wishes to issue bonds must ensure that such is backed by a law enacted by the State House of Assembly, specifying sinking funds fully funded from the consolidated revenue fund account of the state.

 

 

It also harped on the need for state governments wishing to float bond to have in place a fiscal responsibility law, with provisions for public debt management in order to enhance investors’ confidence in the issuer (the state).

 

 

“State governments as agents of development are saddled with responsibilities that are sometimes beyond their current resources, given the level of economic development in the country. The recourse to the capital market to fund projects, especially of long gestation periods, should therefore be encouraged as this will not only improve the socio-economic well-being of the people but also deepen the capital market.

 

 

“It is believed that conferring liquidity status on state government bonds would promote investments in these securities, encourage the regular issuance of the bonds by state governments, stimulate primary and secondary market activities and facilitate the development of the Nigerian capital market,” the CBN added.

 

 

The CBN also stressed that such fixed income instruments shall at inception and throughout its tenor be determined by a rating agency accredited by the Securities and Exchange Commission (SEC), adding that the capital market apex regulatory body shall confirm that the proceeds from the offer have been disbursed in line with the provisions of the prospectus shall bond issuance.

 

 

The CBN added: “Repayment structure should be from funded sinking funds (i.e. a legislated irrevocable standing payment order (ISPO) and/or other legislated sources of repayments disclosed in the offer documents). The Trustee(s) to the bond should submit, every six months, a statement of accounts of the sinking funds’ investments and statement of declaration on the sufficiency of the sinking funds’ investments and investment income in meeting the debt service and redemption obligations to the Financial Policy and Regulation.

 

 

“For the purpose of computing the capital adequacy ratios of banks and discount houses, state government bonds with liquid asset status shall be assigned a weight of 20 percent or as may be prescribed by the CBN from time to time. State government bonds which meet the criteria for liquid asset status shall be eligible for repurchase or “repo” transactions and the CBN shall open an account with the Central Securities Clearing System (CSCS) Limited to warehouse the securities.”

 

 

 

(Source: Thisday)