Photo by Hans Veth on Unsplash
Photo by Hans Veth on Unsplash

According to data from Security and Exchange Commission, the very first corporate bond issued in Nigeria was by The Broadcasting Corporation of Nigeria. It was a £210,000 Bond issued in 1960 and expected to mature in 1963. Within that decade, there were 3 more issuances before the bond market got stunted by the civil war.

There was only 1 in the seventies, represented by Nigerian Sugar Company. There were 12 more in the eighties and 31 in the nineties, an era dominated by military rule. The next decade ending in 2010 attracted 18 issuances.

In the decades leading up to the last, corporate bond issuances averaged 2.8 per annum. Within the last 6 years, between 2011 and 2016, there have been 33 bond issuances with 10 happening in 2016 alone.

Nigeria has witnessed the resurgence of debt issuances in the last 5 years and the tempo has been on the increase. From corporates in the banking sector, to real estate and to those in the FMCG, businesses are seizing the opportunity to raise capital from a debt market that has seen its risk appetite grow in recent times. For household brands looking to expand their dominance and market share, it has been bliss.

Dufil Prima, makers of Indomie Noodles have a N40 billion bond issuance currently running. The Lacasera company, Chellarams, Dana Group, C&I Leasing, NAHCO all have their own bonds in the market. Smaller players are also not left out.

Last year, in the same market where Lafarge raised N59 billion, less conspicuous Mixta Real Estate borrowed N4.5 billion with a promise to pay 17% in coupon. Corporate Bonds and Commercial papers are all experiencing a bull run as Nigeria claws its way out of the recession.

To get out of recession, the government has had to look for funding to finance capital projects that it believes will both stimulate the economy and create jobs. The Federal Government’s debt binge has hit record proportions and is financed mostly by (you guessed right) bond issuances.

Data from the FMDQOTC reveals the current corporate bond market is valued at N312 billion, state bonds N434 billion and FGN Bonds at N7.9 trillion. With yields as high as 17%, it’s not surprising to see why the appetite for debt instruments is gaping wide. The alternatives will be stocks which pale in comparison to what debt instruments have to offer.

For example, while bonds sell for coupon rates of 17% and above, equities offer dividend yields in single digits. Bonds are also not exposed to the wild swings of price volatility and are purchased mostly by savvy rich mutual and pension funds owned locally and abroad. Add the fact that bondholders rank higher than equity holders in terms of claims to a company’s cash flow then you start to realize why debt is so tasty for those who buy it.

What does this mean for stocks?

Maybe not much. But if you consider that the stock market relies largely on liquidity to create value creation opportunities, then there might be a cause for concern. Or perhaps an opportunity for those looking for higher returns on investments to capitalise on.

A rising stock market could posse a reduce company appetite for raising equity through public offers or right issues. Except for a few right issues, Equity fundraising has dried out in recent years due to lower market values assigned to stocks and weak demand.

Analysts believe the proposed MTN IPO might renew interest in the equity fundraising considering the size and opportunity inherent in the proposed offer. However, concerns remain especially of other mainstream conglomerates prefer to raise capital in the bond market, rather than list their shares on the Nigerian Stock Exchange.

Just like equities, bondholders need not hold their securities till maturity and avoid the volatility that comes with investing in stocks. Add to the fact that bond yields are better than equities and it’s easy to understand why corporate bonds are somewhat of a threat.

Unfortunately, unlike stocks, you need to have millions of naira in cash to play in the bond market. This is not the equities market where N50k can get you shares in Dangote Cement or Zenith Bank. The secondary market for Debt Securities has never been for the small player or faint-hearted. It’s a complex interplay of timing, risk, and reward.

Should we be worried?

To be fair, Nigeria’s corporate bond market is still relatively small compared to more advanced FGN Bond Market. However, it is rising and everyone is getting in on it. Earlier in the year, a little-known finance company (name withheld) raised N300 million in unsecured debt securities at an interest rate of 19%.

If you consider that banks will perhaps charge 24% for the same debt, it suggests that this might just be the new norm. More and more companies are seeing this as an opportunity to broaden their capital base.

Why bother to raise money from the banks when there is a bond bonanza. When the bonanza ends then we can start to worry about the consequences for the economy.

 

Coronation Research

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