Business disruptions, low returns on equities, hunt for value by issuers and investors, amidst other variables, seem to be fueling recourse to the Debt Capital Market in Nigeria, KENNETH EZE writes…
Nigeria’s debt capital market opened on a high in January 2021, when the FMDQ Securities Exchange Limited admitted four Commercial Papers valued at N37bn for three issuers in different sectors of the economy.
Total Nigeria Plc secured the approval of the Board Listings and Markets Committee of the Exchange for its N2.25bn Series 1 and N12.75 Series 2 CPs under its N30bn CP issuance programme, while Mixta Real Estate Plc secured approval for its N2bn Series CP under its N20bn CP issuance programme.
Also, Valency Agro Nigeria Limited got the committee’s nod for the admission of its N20bn CP the same day, thus ensuring that three different sectors of the economy buoyed up the DCM within days into the year.
With the year now in H2, several approvals have been given by the Committee for admission and listing of different applications. They include bonds and CPs valued at over N416.39bn in 32 different applications, with varying proportions and tenures, involving over 20 notable and not so notable companies, with almost every sector of the economy represented.
The FMDQ Securities Exchange Limited, explaining the increase in DCM activities in the domestic economy, said, “The new year 2021 arrived with renewed hopes for the continued development of the Nigerian financial markets as corporates have already commenced with planning towards the achievement of their strategic goals and objectives.”
On the rationale for increasing appetite for DCMs by issuers and investors alike, the Exchange, explained that DCMs offered an avenue for corporate organisations and governments to raise debt capital from investors, seeking viable investment opportunities.
The Exchange considers that DCMs “are fundamental to the proper functioning of financial markets and provide leverage for an economy to thrive.”
Notable among the corporates who have taken the DCM route to bolster working capital since the beginning of the year in Nigeria are: Fidelity Bank Plc (N41.21bn, fixed rate subordinated unsecured bond); MTN Nigeria Communications, (N73.51bn, CPs, in two tranches); Nigerian Breweries Plc, (N4.66bn, in three tranches).
In the case of NB, a statement from the FMDQ revealed that the N4.66bn “brings the total CPs series issued by the issuer, since the renewal of its N100billion CP Programme in 2019, to N156.20 billion, with a total of N14.76billion currently active.”
Others are FBNQuest Merchant Bank, (N7.34bn, CP); Union Bank of Nigeria (N34.96bn, CPs, in two tranches); Fidson Healthcare Plc, (N10bn, CP); Total Nigeria Plc, (N15bn, CPs, in two tranches); Flour Mills of Nigeria Plc, (N29.89bn, Fixed Rate Bonds, in two tranches); and International Breweries Plc (N65bn, CP).
Many of the corporates appear to be relishing the DCM because their management have obtained necessary approvals, intra-company and externally, for large sums of money and are resorting to. it, in parts on need basis. The NB experience also shows that they refill, as they exhaust.
Factors boosting the DCM in Nigeria
Corporates are reacting to the peculiarities of the operating environment and investor-apathy towards equity offerings among other things, by focusing on the DCM for short-term capital solutions.
The Exchange explained, “The Nigerian debt capital market (DCM) has continued to demonstrate buoyancy and resilience in the face of the pandemic, authenticating its role and increased capacity to support domestic economic growth by providing alternative capital sources as well as the much needed liquidity to boost working capital for corporates and governments.”
It added, “The Nigerian economic landscape and business environment has continued to witness disruptions as occasioned by the COVID-19 pandemic with attendant concerns of a prevailing second wave despite global vaccination efforts and restrictive guidelines put in place by governments and advisory bodies.
“The situation has seen corporates across multiple sectors re-evaluate their financing strategies going into the new year by tapping (into) the debt capital markets as a viable avenue to efficiently raise capital in order to meet their business expansion/working capital needs.”
The Exchange averred that the critical role which debt markets played in facilitating sustainable growth and development could not be overemphasized because the peculiarities of the investment climate in Nigeria had been tasking corporates to rethink sources of working capital.
“The Nigeria debt capital market (DCM) plays an important role in the efficient mobilisation and allocation of resources in the economy and despite the impact of the current times, the market has continued to effectively support corporates looking to expand their business operations,” it said.
An investment banker, who spoke with The Point on the telephone, highlighted that the “Debt Capital Markets refers to the segment of the financial markets in which companies, governments and other institutions raise funds through the issuance (and trading) of debt securities such as treasury bills, commercial papers, promissory notes, bonds, etc.”
In her contribution, a stockbroker, who also gave her view on the matter in a telephone interview with The Point, said, “Debt securities are financial instruments which represent a contractual agreement between the issuer to borrow funds from the investors, also called lenders, at an agreed interest rate over the term/tenor of the debt.”
The defining factor, she said, “is that the debt security entitles the investors to a stream of fixed or predetermined interest payments based on the interest rate of the security until the repayment of the principal at maturity, which is why they are also referred to as ‘fixed income securities.’”
The Prospectus for DCMs is normally released with details of tenor and other terms, and covers subjects like subscription, interests and repayment terms. The interest rate for a debt security would normally depend on the perceived creditworthiness of the issuer and the tenor of the debt security.
Watchers attribute the upbeat nature of the DCM to several factors, including the COVID-19 disruption of businesses, the low appetite for the equities and money markets by investors, and corporates’ yearning for cheaper sources of working capital and expansion of operations.
What is remarkable is that all sectors of the economy have been resorting to the DCM more than ever before since the turn of the year, with banks (who should ordinarily be lending), telecommunications, agriculture, food processing, pharmaceuticals, oil and gas all jostling for investors’ attention in this segment.
Probably, discouraged by uncertainties in the equities capital market, investors have been taking refuge in the DCM with most of the bonds and CPs issued within the period being zealously embraced by investors.
From the high level of activities in the DCM, it is evident that risk averse investors are content with low and guaranteed returns, as against watching their capital eroded by fluctuating share prices in the equities market, and uncertain, zero or no returns on investments on equities, occasioned by tough economic environment that have come to characterise the Nigerian investment climate.
The lure of issuers to the DCM
From what is obtainable in the capital markets in Nigeria, reputable corporates have been reluctant to issue equities for public subscription, since investor apathy and harsh operating environment seemed to have ganged up against the success of offerings in the domestic stock market, thereby, forcing businesses that require capital stimulation to enhance or stabilise operations to resort to the DCM.
The Finance Director, Nigerian Breweries Plc, Rob Kleinjan, might have expressed minds of several financial strategists mandated to source working or expansion capital for corporates, when he expressed pleasure at having alternative source of short term funding.
“We are pleased with the continuous opportunity to access alternative source of funding to meet our short-term working capital needs,” he said.
Another factor is that the DCM guarantees that bonds, CPs, promissory notes and other investment instruments come with tenor and lower interest rates than commercial lenders are willing to offer in the domestic market.
In business, volume could go a long way in determining value. The DCM offers the volume that mega corporates can conveniently access to give themselves the kind of lift necessary to optimise operations and returns, because the investing public can take up stakes in what is offered according to each investor’s ability, with returns fairly guaranteed as stated in the prospectus.
The Managing Director/Chief Executive Officer, Fidelity Bank Plc, Nneka Onyeali-Ikpe, pointed this out after her bank’s successful CP listing.
She said, “This is a landmark bond issuance. It is by far the largest local bond transaction by any commercial bank in Nigeria, thus validating the continued investor confidence in our well-experienced management team.”
She explained why most corporates would continue resorting to the Exchange because of the transparency and value it confers on their issues, which goes a long way to boost investor confidence.
“By registering and listing the bonds on FMDQ Securities Exchange Limited, Fidelity Bank has provided its bondholders a robust and transparent platform that will improve the liquidity and visibility of their investments,” she said.
