Corporate Debt Markets in Nigeria: Emergence of Green Shoots?

True to their typical bandwagon form, Nigerian Corporates (particularly the Banks) have been falling over one another to announce one multi-billion naira bond issuance programme or the other over the last few weeks. These programmes are designed to cover potential multiple bond issuances across various maturities and structures over the next 2 years (which is the typical life of a Shelf filing in Nigeria). Some of the deals announced include: GTBank Plc - N200 Billion (US$ 1.4 Billion), First Bank Plc - N500 Billion (US$ 3.5 Billion) and UBA Plc - N500 Billion (US$ 3.5 Billion). Many more of such deal announcements are expected in the coming weeks.

Though I am very skeptical of the chances of success of these Jumbo Bond programmes and slightly disgusted at the "follow follow" nature of their potential issuers, I am generally pleased with their implications for the financial markets and economy. Corporate Debt has been, and remains, an underinvested asset class in Nigeria with the last publicly issued corporate bond being Access Bank's Convertible Bond issued in 2006. Since its redemption, the number of corporate bonds in issue in Nigeria amounts to a grand total of" ZERO!.

Despite the flurry of announcements, the building blocks of a decent corporate bond market are largely non-existent in Nigeria. There is no network of corporate bond dealers willing to make markets, settlement platforms for bond trading are largely non-existent while skilled and experienced hands in bond structuring are few and far between. Furthermore, the Stamp Duty and other related charges on primary debt issues make bond issuances a very expensive proposition for would be issuers.

Despite this, the story is not all gloomy. The considerable success of the Federal Government of Nigeria (FGN) Bond market and its network of Primary Dealers/Market Makers (PDMMs) may be leveraged on in corporate bonds. FGN Bonds are so liquid and highly traded that annual volume of trades last year exceeded that of the Nigerian Stock Exchange (NSE) handsomely. The banks and Discount Houses serving as PDMMs can scale up their activities to include making markets in corporate bonds. The active trading of these bonds has also created - for the first time in Nigeria - a risk free yield curve (extending to 20 years) from which corporate bond issues of various maturities can be priced.

The demand side also gives much to cheer about. The advent of Pension Fund Administrators (PFA) has resulted in serious latent and unmet demand for corporate bonds. All PFAs are currently grossly underweight in this asset class as they are permitted to invest up to 30% of their assets in corporate bond instruments. Many of them are likey to be enthusiastic buyers in the near future as they seek to build up their corporate bond portfolios from a near zero basis. The supply side of the equation is also going to get deeper as the effects of the banking sector sector crisis and subsequent cleanup cause banking loan portfolios and appetites to shrink across board and lead to seriously compromised financial intermediation capabilities. Many highly rated corporates may decide to approach the debt markets directly for financing rather than be at the mercy of banks that are probably in a weaker financial position than they are.

On the regulatory side, the stars also seem to have aligned very nicely in favour of corporate bond market development. The CBN Governor has - from his first press briefing - always reiterated his support for a virile corporate debt market to reduce pressure on the banking sector. The current Finance Minister: Mansur Muhtar served as a Director General of the Debt Management Office (DMO) and it was under him that many innovative measures - such as the PDMM framework - were introduced into the FGN Bond Market. Debt Market proponents are very likely to get a receptive hearing from him. In addition to these people, the recently nominated Director General of the Securities and Exchange Commission (SEC), Arunma Oteh, was a past treasurer of the African Development Bank (ADB) and has spent most of her career working in Supranational and Sovereign Debt Capital Markets and funding. I dare say that Nigeria has never had a trio of people so conversant with, and supportive of, Debt Capital Markets as we currently do, this chance must not be wasted but seized upon to bring lasting development to the Corporate Debt marketplace.