The domestic bond market has been an attractive place for the federal and state governments to raise funds to finance developmental projects, but private companies appear not interested despite its huge potential. OYETUNJI ABIOYE examines the issue.

While companies are still visiting the capital market to raise funds, the same is not with the bond market. The situation has become a source of worry to the government and financial analysts, who feel it is not good for economic growth and development.

The primary goal of the bond market is to provide a mechanism for long-term funding of public and private expenditure.

The Federal Government has been raising money in the domestic debt market to meet its borrowing needs.

Also, several state governments have gone to the domestic bond market to raise several billions of naira to finance huge projects.

The achievements recorded in the development of the domestic debt market led to the recognition and endorsement of the FGN bond market by reputable international institutions such JP Morgan, which included FGN bonds in its Emerging Markets Government Bond Index.

Barclays also included FGN bonds in its Emerging Markets Local Currency Bond Index.

But as attractive as the domestic bond market has been to the federal and state governments, private companies are running away from the funding option, according to industry experts.

However, financial analysts and industry experts believe the reason for the trend is not farfetched.

The Executive Director, DLM Securities, Mr. Idowu Ogedengbe, says the higher coupon or interest rate, which a prospective corporate-borrower is expected to pay on issued bond, is responsible for the ugly situation.

According to him, corporate bodies willing to issue bonds must be ready to offer coupon or interest rate that is far higher than what the federal and state governments have been offering to investors who buy their bonds.

The DLM official says, “Corporate bodies will have to offer higher interest rate or coupon. It has to be higher because the FGN bonds are sovereign bonds and, as such, are risk free. But for private companies or corporate, prospective investors will look at whether those private companies will be able to meet up with the payment of interest as well as the principal at maturity. A private company may need to make its coupon on interest higher than that of the FGN bonds by about 300 basis points.”

Often times, the fear of not getting favourable rating to make them scale through the regulatory process of issuing bonds is another reason most corporate bodies do not issue bonds.

The Head of Research and Intelligence, BGL Securities, Mr. Femi Ademola, says the domestic bond market is never attractive to Nigerian private companies.

According to him, the administrative cost of issuing bonds with the cost of capital in the domestic bond market is prohibitive and, as such, it may not make any business sense for any of the Nigerian corporate firms to visit the market for funds.

This, he notes, is coupled with the fact that the operating environment which lacks constant power supply and adequate infrastructure will further raise the cost of doing business.

Ademola says, “The cost of issuing bond as well as the cost of the capital to be raised is very prohibitive. If you want to issue a bond, you will have to appoint financial advisers which will be done at certain cost. There are also regulatory fees to be paid.  And at the end of the day, you may have to issue that bond at close to 20 per cent coupon or interest rate.

“After raising that money through bond, you will then face the operating environmental challenges like lack of power and infrastructure. How much will you make from that business to be able to meet up with the repayment of the coupon and then the principal at maturity? This is why companies will prefer to go to the bank to secure short-term loans of say two years at over 20 per cent, rather than go to the bond market to commit themselves to long-term loan at the same over 20 per cent.”

The BGL official notes that the Central Bank of Nigeria’s decision to keep the Monetary Policy Rate at 12 per cent in order to tighten liquidity may have been responsible for the high cost of capital at the bond market.

He recalled that about three years ago when the MPR was kept at less than 10 per cent, a few private companies went to the domestic bond market to raise funds.

Ademola believes that until the CBN soften its monetary tightening policy by reducing the MPR, activities may not be boosted in the bond market for the private companies to partake.

An investment expert and Chief Executive Officer, Lambeth Trust, Mr. David Adonri, believes the ‘intense activities’ of the Federal Government on the bond market may have ‘crowded out’ corporate companies from participating in the market.

Adonri explains, “Before the 2008 meltdown, it was very easy for companies to access the capital market in Nigeria for equity funds. The low cost of equity finance and immense popularity amongst investors made the corporate bonds market unattractive. At the same time, yield on debt securities was very low compared to returns on equity.”

He adds, “However, things changed after the meltdown. A combination of favourable factors escalated the yield on debt securities, thus facilitating mass exodus of financial assets away from equities to the debt market. The major beneficiary of this drift has been the Federal government whose intense activities have crowded out the private sector from the debt market. As a result of the high interest rate on Federal government bonds, corporate issuers have found it difficult to compete due to the implication of high rates on their profitability.”

Experts also note that corporate companies do not even bother to go near the external bond market, called the International Capital Market, because of the stringent rules of raising bonds there.

The Lambeth boss also raises the issue of high ratings requirement in the ICM as a reason for Nigerian companies’ absence in the external debt market.

“Only very few companies can access the international capital market for debt funds due to high ratings requirement. Additionally, such companies must earn a sizable proportion of their income in hard currency in order to service repayment obligations.”

Adonri, however, expresses note that things are improving, stressing that some Nigerian banks have gone to the ICM to raise funds.

He says, “The situation is actually improving now with more corporate bonds issued by banks and other companies listed on the NSE. The banks are also involved in capital raising activities from the international capital market. I hope they will earn enough foreign income to service the obligations when they fall due.”

The Director-General of the DMO, Dr. Abraham Nwankwo, says, in response to the creation of a sovereign benchmark in the ICM, four Nigerian financial institutions have issued Eurobonds amounting to $1.45bn in the last two years.

He gave the list as Guaranty Trust Bank Plc, $500m; Access Bank Plc, $350m; Fidelity Bank Plc, $300; and First Bank Plc, $300m.

Nwankwo believes the government has opened an access to funding opportunities in both domestic and external debt markets, and expects the private sector to key into it.

The DMO, according to him, will strive to encourage more Nigerian corporates to leverage on the existing sovereign benchmarks to raise long-term capital in the domestic and ICM to develop the real sector and build infrastructure.

According to him, the DMO will strive to strengthen and deepen the FGN bond market for enhanced liquidity through the continued issuance of benchmark bonds and the introduction of other varieties of debt instruments such as securities lending, bond switches and inflation-linked bonds into the domestic bond market.

He also says the country’s presence will continue to be strengthened in the ICM through the issuance of other varieties of debt instruments such as the approved N80bn FGN bonds in the form of Global Depository Notes and $100m Nigerian Diaspora Bond.

Source: Punch (by Oyetunji Abioye)