Low Interest Regime Driving Activities in Corporate Debt Market

Dike Onwuamaeze

The Central Bank of Nigeria’s (CBN) restrictive monetary policy enabled corporate organisations to raise N1.02 trillion from the local currency debt market in 2020.

The figure borrowed in 2020 represented 52.4 per cent increase when compared to 2019 level of N669 billion.

The GCR Ratings Research latest report on Nigeria’s capital markets stated that issuance of corporate debt spiked as firms took advantage of the lowered monetary rates to either refinance expensive bilateral loans with banks or raise additional debts.

The report projected that the trend would continue in 2021, as more corporate debt issuance was expected over the year.

Among the companies that took advantage of the low valuation to raise funds, according to the GCR report, were the Emzor Pharmaceutical Industries Limited (EPIL), the MTN Nigeria Communications Plc and the Dangote Cement Plc.

It noted that EPIL issued N13.73 billion of bonds in support of its expansion plans and backward integration initiative into active pharmaceutical ingredients.

Similarly, MTN also raised N110 billion of bonds to optimise its existing funding mix and finance network expansion, while the Dangote Cement Plc raised bonds to fund expansion projects, refinance short term debts and support its working capital needs.

It added: “Issuing debt instruments is increasingly becoming a viable funding source for Nigerian entities. Companies are diversifying their funding base through the issuance of commercial paper (CP) and bonds.

“Year 2020 saw a record number of CP issuances, 66, up from 60 issued in 2019, and a record amount of corporate bond issuance at N259 billion.

“Over the first quarter of 2021, we had already witnessed 18 new CP transactions. Going forward, the demand and supply-side dynamics are expected to continue to be supportive of local currency debt issuance in Nigeria. We expect debt issuance to remain at the N1 trillion level in 2021,” the GCR said.

It stated that companies in the financial services and industrial sectors make up 42 per cent and 26 per cent of total issuance, respectively.

It said: “Debt capital market activity in Nigeria has increased significantly in recent years. Nigerian corporates issued a record N1.02 trillion of local currency debt instruments in 2020. Seventy five per cent of the issuance, which is N762 billion, was short-dated commercial paper while N259 billion (25 per cent) was longer-term bonds.”

It further stated that the key driver of the robust growth in corporate debt issuance in Nigeria in 2020 was low borrowing rates as yields on short and long-term debt instruments dropped to record low last year due to excess liquidity in the market after the CBN imposed restrictions on its OMO and eased monetary policy to aid economic recovery.

“Since the beginning of 2021, the CP rates continue to remain lower than the prime lending rates at banks. According to FMDQ Securities Exchange, current valuation yields for CP ranged between 4.1 per cent and 10.4 per cent versus the average prime lending rate of 11.13 per cent.

“As of March 2021 (the prime lending rate at some Nigerian banks was as high as 27 per cent). Overall, GCR believes Nigerian corporates will continue to look to capital markets as an alternative and complementary source of funding to bank borrowing,” the GCR report stated.