A major driver for Nigeria’s investment and credit spreads is this year’s election process and outcome, and of course, economic growth and diversification. The bond market is one of many strategies that the government is using to project the country as well as equip the private sector. Last week, the Debt Management Office organised a one-day workshop in Lagos on leveraging Nigeria’s international bond, among other issues. BUKKY OLAJIDE was there.
FOR any economy that wants to experience a major and continuous breakthrough, its managers must take the debt capital market instrument serious.
Bond, a major debt market instrument is a debt investment in which an investor loans money to an entity, which may be a corporate entity or government.
It is borrowed for a defined period of time at a fixed interest rate. Therefore, bonds are fixed-income securities and belong to the three main assets classes of stocks and cash equivalents.
Local bond markets have a lot of benefits. They can be used for housing and infrastructure finance while the borrowers can gain better risk management through; lower interest rates, reduced foreign currency and refinancing risks.
The local bond markets also mean improved yields for institutional investors, improved ability to deal with financial crises, financial sector diversification, accelerated private sector development as well as reduction in exchange rate risks.
But, in sub-Saharan Africa, the use of bonds market to support the housing finance needs has been negligible, says Solomon Quaynor, the country director for International Finance Corporation (IFC).
According to him, majority of infrastructure financing in sub-Saharan African from local sources is through bank loans.
The bond issue and its benefits formed the focus of a one-day workshop organised by the Debt Management Office (DMO) in Lagos last week.
There is something referred to as non-government bonds. This encompasses bonds and asset-backed securities issued by entities that is not governmental.
This includes corporations, states project finance companies and supranationals.
Non-government bonds are typically issued locally and denominated in local currency but can also be accessed internationally.
They are beneficial because they diversify funding intermediation to complement banking and reduce risks of external shocks while also helping to optimise capital structure of corporates.
At the event, the Director-General of DMO, Mr. Abraham Nwankwo said that sovereign domestic Bond Market creates an enabling environment and access for the private sector.
More importantly, he said the objective of using bond market activities to support the private sector will be sustained.
Stating those characteristics needed for a vibrant bond market, the IFC country director mentioned enabling environment.
This includes; macro-economic environment, legal and regulatory issuance process and tax regimes.
The market place is another characteristics. This includes trading, clearing, settlement and depository. Others are pre-trade and post-trade transparency as well as the Bond Market structure.
Capacity as a characteristic for a vibrant bond market is not left out. This includes bankable projects and sponsors, and informed intermediaries and investors.
Explaining that non-government bonds are key for infrastructure financing but that majority of infrastructure financing in sub-Saharan Africa from local sources is through bank loans, Quaynor said, however, in 2006, 20 per cent of outstanding corporate bonds in South Africa were issued by infrastructure providers.
In comparison, in Chile, an average one billion dollars of infrastructure bonds a year were issued between 1996 and 2003, equivalent to 50 per cent of all issues.
Also, while saying that in sub-Saharan Africa, the use of bonds markets to support housing finance needs has been negligible, he however observed that countries such as Chile, the Czech Republic and Hungary meet over half of their mortgage funding needs through simple debt instruments such as covered bonds.
All the same, he said this is not pervasive across the board in most emerging markets, saying that even in Europe in 2007, 17 per cent of mortgages in Europe were funded by Covered Mortgage Bonds (CMBs).
Looking at specific countries and the development of the bond market, Quayuor stated that South African bond market’s total market capitalisation as at end of 2010 was $170.4 million.
And while total number of issuers was 105, state-owned enterprise was seven, securitisations was 34, corporate banks was 12 and corporates non-banks was 38.
The total market capitalisation of Kenya bond market was $8.9 million as at end of 2010, and the total number of issuers was 19 with corporates non-banks taking a larger share.
According to the IFC country director, pension reform was effected in Kenya in 2001, which has made possible significant growth in assets under management to date.
He added that pension and insurance funds accounted for 55 per cent of investments in corporate bonds and 42 per cent Treasury Bond holdings in 2009.
In East Africa, the broad range of sectors have tapped the bond market, therefore, markets have recorded significant increase in issues since 2007 though from a very low base.
Indonesia’s bond market on its part is modest in size and growing gradually.
According to Quaynor, it is denominated by government bonds although corporate bonds emerge as a significant source of private sector financing after 2002, adding that the size of the corporate market is approximately 10 per cent of the government bond market.
In the case of Nigeria, Quaynor advocated that the country should capitalise as the macro-economic environment is becoming more favourable for debt capital markets.
Better macroeconomic management entails; lower inflation, lower interest rates and more stable exchange rates, while development in government bond markets will entail; tenor extension and flatter yield curves.
According to him, the remaining impediments to corporate bonds should be resolved to catalyse new issues.
The non-government bond, therefore:
• Would provide local investors with an opportunity to diversify and strengthen their portfolios with low risk, local currency denominated assets.
• Would provide an important “significant effect” drawing local and international attention to a market that seeks to attract foreign investors and issuers.
• Supranationals working, directly and indirectly, with the local financial sector, would help transfer financial know-how.
• Would help develop the local corporate bond market, building the yield curve and establishing pricing bench markets that can be used by local issuers.
• Would provide a source of local currency to supranationals to be used to lend/invest in the country.
• In Nigeria, potential supranationals issuers interested in raising bonds to finance local infrastructure and housing projects, amongst others, include: IFC, AfDB, AFC.
• If part of issues are swapped, would increase liquidity in the local derivatives and swap markets, creating more opportunities for local enterprises to hedge interest rate and foreign currency risk.
The duo of Taiwo Okeowo, executive director, Investment Banking and Asset Management at the First Bank of Nigeria Capital and Jonathan Segal, Managing Director and head of Debt Capital Markets, Barclays Capital, spoke on leveraging the Nigerian sovereign benchmark.
According to the duo, Nigerian issuers can leverage the sovereign to develop dialogue with international investors and access the capital markets.
They explained that Nigeria’s debut issuance in the international capital markets created a pricing reference for future borrowing from Nigerian issuers.
They explained that while many investors are familiar with the Nigerian story via investments in other areas (for example, oil-related projects or equity markets), the sovereign bond specifically targeted fixed income investors who had previously only seen bank issues.
Stating that sovereigns play a critical role in the capital market, Okeowo and Segal observed that sovereigns have historically contributed a large portion of total emerging markets issuance.
According to them, lower global interest rates fueled investor demand for yield, providing emerging markets corporates and banks with increasingly attractive access to the international capital markets.
Non sovereign issuers find market access easier following the issuance of a sovereign benchmark as investor attention is re-focused on the particular jurisdiction,” they said.
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