With Funding Alternatives, Corporate Bond Suffers

Raising capital through issuance of corporate bonds to fund their businesses appear to have become unpopular among private companies in Nigeria as activities in the corporate bond segment of the capital market have suffered a big setback in recent times, according to recent figures from the Debt Management Office. Bamidele Famoofo unveils the alternative funding source for the big corporations in this report

The Reality

Recent figures from the Debt Management Office (DMO) showed that Nigerian companies are increasingly reducing their patronage of debt instrument, available in the corporate bond section of the Nigerian capital market, to finance their operations.

The DMO, in its 2017 annual report published recently, showed that less number of companies visited the capital market in 2017 to raise money compared to 2016.

Specifically, the report from DMO showed that only three companies which are Dufil Prima Foods Plc, Viathan Funding Plc and LAPO Micro Finance Bank SPV Plc, accessed the domestic bonds market to raise capital in 2017 with a total issuance of only N23.15 billion, representing 78.6 percent decline from N108.04 billion in 2016. Nine corporate organisations as against three in 2017 visited the capital market to seek funding for their businesses in 2016.

Dufil Prima Foods, producers of Indomie, approached the debt market in August 2017 to raise N10.0billion in a Serie One five years tenor bond that will mature by September 2022 while Microfinance Bank LAPO sought N3.15billion five years tenured financing in December 2017.

Viathan Funding Plc was the third corporate entity to visit the local bond market to access N10.0billion that will mature in 10 days. The firm visited the bonds market December 15, 2017 to make the issuance,- which will mature on December 14, 2027.

Meanwhile, DMO disclosed that corporate bonds issuance by corporate entities in 2015 amounted to N226.15billion.

The Clog

“High cost of borrowing prevalent in the domestic capital market in 2017 was a major disincentive to corporate organisations which normally would have approached the local debt market for capital,” the DMO suggested.

It, however, said it expected corporate bonds issuances would increase in the near term with the easing of inflationary pressure and reduction in yields of sovereign benchmark.

Meanwhile, Nigerian capital market sources have queried the impact of federal government policy pronounced in March 2010 on waiver of income taxes on interest on all bonds including corporate and sub- national bonds. The waiver was designed to encourage more activities in the bond market, and ensure cheaper and stable long-term source of funds for project finance and economic development in general. A reduction in stamp duty by 80 per cent was approved for debenture re-issues.

Analysts had hoped that the removal of taxes on corporate and sub-national bonds will put them at par with federal government bonds, which are already exempt from tax. Also, the waiver was meant to effectively extend the tax incentive to treasury bills and other short-term government borrowings which did not previously enjoy tax waivers.

“Potentially, the tax waivers will impact the companies’ income tax and personal income tax revenue accruing to governments at the federal and state levels especially in the short run,” capital markets analysts with PriceWaterCoopers (PWC) had hoped when the policy was announced.

Notwithstanding the apparent setback the corporate bonds market has witnessed in terms of patronage by corporations, capital market experts believe it is a place to make good profit for investors.

For instance, analysts at FSDH Merchant Bank Limited, in their second quarter review of the capital market, predicted that investors would take profit on some of their investments in FGN Eurobonds and move their investments to some of the corporate Eurobonds with higher yields.

It noted that some of the corporate bonds trading in Nigeria also have attractive yields, which investors could take position in, stating that such an investment strategy would create liquidity in the Nigerian corporate bond market, though, it warned that the declining inflation rate may lead to a further drop in the yields on fixed income securities, particularly at the short-end of the yield curve.

Alternative Funding Source

Whilst the corporate bond market is losing out, the Commercial Paper market is gaining as big corporate organisations have turned to the short- term debt market for financing.

Recently, Dangote Group, known to be the largest indigenous industrial conglomerate in Sub-Saharan Africa, through its subsidiary, Dangote Cement PLC, Africa’s largest cement producer, successfully raised from the Nigerian Commercial Paper (CP) market, N50billion worth of CP notes. With due diligence provided by its Board Listings, Markets and Technology Committee, FMDQ OTC Securities Exchange admitted on its platform, the largest CP issuance by a non-financial institution – the Dangote Cement PLC N50.0 billion Series 1 & 2 CP Notes under its N150.0 billion Domestic CP Issuance Programme.

“Following the resuscitation of the Nigerian CP market by FMDQ in 2014, transparency, price discovery, liquidity, efficient quotation processes, amongst others, have been established in the market, paving the way for issuers and investors to effectively and sustainably meet their funding needs, as well as contribute to the development of the nation’s debt markets”, a source at FMDQ OTC Securities disclosed .

Directorate Head, Capital Markets, FMDQ, Ms. Tumi Sekoni, said the decision of Dangote to raise funds from the debt markets was testament to the restoration of confidence in the Nigerian CP market, which had been marked by an extended period of dearth of activity, significantly weakened issuer interest and diminished investor confidence.

She expressed confidence that the issuance by Dangote would encourage other corporates and commercial entities to effectively tap the potential burgeoning CP market to finance their short-term funding needs, thereby adding deepening the depth of the Nigerian debt capital markets (DCM). She concluded by adding that the quotation of the CPs would undoubtedly pave the way for the establishment of a globally recognised non-financial corporate benchmark for the Nigerian CP market, owing to the associated rating and reputation garnered by the Dangote conglomerate and encouraged the issuer to continue to tap the debt markets to ensure the actualisation of the desire for a corporate benchmark in the Nigerian debt markets.

Group Chief Executive Officer of the Dangote Cement PLC, Mr. Joseph Makoju, during the issuer’s special address, stated, “This is the largest commercial Paper issuance of any Nigerian company and we are delighted to list it on FMDQ, which has significantly contributed to the development of the domestic debt capital market in Nigeria. By promoting transparency, governance, integrity and efficiency in the CP market, FMDQ is encouraging issuers like ourselves to explore alternative funding sources in the Nigerian capital markets.”

Besides Dangote, players in other sectors of the economy which includes those in banking have taken advantage of the CP market to raise financing capital. For instance in June 2018, FMDQ approved the successful quotation of the Coronation Merchant Bank Limited N20.00 billion Series 1 & 2 CPs under its N100.00 billion CP Programme. The CP is expected to enhance liquidity buffers of Coronation Merchant Bank Limited, a key player in the Nigerian banking industry.

In 2018, UACN Property Development Company (UPDC) Plc, Nigerian Breweries Plc and Sterling Bank Plc have raised N12.34 billion, N16.43billion and N18.69billion respectively through CPs among others.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria at its July meeting suggested that big Nigerian corporations stick to their decision to patronise the CP Market for funding. “Consequently, credit constrained businesses, particularly the large corporations are encouraged to issue commercial paper to meet their credit needs and the Central Bank of Nigeria may, if need be, buy those instruments to complement the efforts of the DMBs”, Governor of the Central Bank of Nigeria, Godwin Emefiele, said.

The communiqué issued at the end of the meeting added: “In addition, as a way to incentivise deposit money banks to increase lending to the manufacturing and agriculture sectors, a differentiated dynamic cash reserves requirement (CRR) regime would be implemented, to direct cheap long-term bank credit at 9 per cent, with a minimum tenor of seven years and two years moratorium to employment elastic sectors of the Nigerian economy. Details of this framework are being worked out by the Banking Supervision, Monetary Policy and Research Departments of the Bank and would be released soon.”

CBN’s Intervention

To leapfrog the economy by means of bridging the funding gap, which the lull in the corporate bond market has created, the CBN has created different intervention funds for corporates that operate in key sectors of the economy.

The apex bank said it has disbursed a total sum of N1.181 trillion through its several intervention schemes in an effort to help grow the Nigerian economy as at June 2017, through its several intervention schemes. The Financial Stability Report for the period ended June 2017, released by the apex bank showed that N472.98 billion used for 513 projects had been disbursed through the Commercial Agriculture Credit Scheme (CACS) since its inception. In the first half of last year, the sum of N79.56 billion had been disbursed to 11 banks for 23 projects compared to N35.99 billion disbursed to 13 banks for 39 projects in the preceding period. This reflected an increase of N43.57 billion and a decrease of 16 projects. Repayments under the scheme during the first half of 2017 stood at N19.78 billion through 17 banks for 185 projects, bringing the repayments to N244.79 billion from inception.

Also, a total of 21,073 loans valued at N3.03 billion had been guaranteed under the Agricultural Credit Guarantee Scheme (ACGS) in the first half of 2017 for two commercial and 36 microfinance banks as against 34,774 loans valued at N4.47 billion for three commercial and 37 microfinance banks in the second half of 2016. This indicated a decrease of 39.40 per cent and 32.21 per cent in the number and value of loans guaranteed. Cumulatively, 1.08 million loans valued N107.04 billion had been guaranteed from inception to end-June 2017 under the scheme. There was also a decline in loan repayment under the ACGS as the sum of N2.94 billion involving 18,600 projects was repaid compared to N5.55 billion for 34,083 projects in the corresponding period of 2016.

Under the N220 billion Micro, Small and Medium Enterprises Development Fund (MSMEDF), only N1.59 billion was disbursed in the first half of last year, compared to N15.15 billion in the second half of 2016. Total disbursement from inception stood at N77.06 billion. A total of 113,077 female and 78,411 male micro-enterprise owners as well as 410 SMEs (commercial bank projects) had benefited from the fund since inception in 2013. In the first half of last year, the sum of N12.58 billion was disbursed to 56,430 farmers in 17 states, compared to N12.09 billion that was disbursed to 49,658 farmers in 16 states in the preceding half of 2016, bringing the cumulative disbursement to N31.52 billion.

The Youth Entrepreneurship Development Programme (YEDP), suffered a setback as N691.02 million was refunded to the CBN due to operational issues relating to disbursements, while N85.75 million was disbursed to 32 entrepreneurs. CBN in the report noted that no application was received under the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) in the first half of 2017. Cumulatively, 88 projects valued at N4.25 billion guaranteed under the scheme were fully repaid. The sum of N22.73 billion was released to seven projects under the Real Sector Support Facility (RSSF), culminating to 10 projects valued at N30.58 billion that had been financed under the initiative from inception to June 2017.