Nigeria: Capital markets getting a lift

After a major debt issue by a World Bank organisation, Nigeria’s bond market is expected to pick up momentum in 2013. Hunger for its emerging-market issues have pushed down yields, helping lower the cost of investment in Africa’s second-largest economy.

The first bond offer by a non-resident issuer in Nigeria proved a stellar success at its launch, as the International Finance Corporation (IFC) increased the size of its float by 50% due to high demand. The February 6 offer by the IFC, the World Bank’s investment arm, was raised to N12bn ($75.68m) from an initial N8bn ($50.45m) after orders totalling N20bn ($126.13m) had been received. The five-year bonds carried a coupon of 10.2%, which is low for Nigeria but high in general due to naira volatility and larger perceptions of instability and risk due to oil price fluctuations.

In January the IFC announced it would be floating $50m in naira-denominated five-year bonds in a move to boost Nigerian capital markets and finance the organisation’s local operations. The IFC has a portfolio worth $1.1bn in Nigeria, its largest in Africa and eighth-largest worldwide.

During a visit to the Lagos-based Nigerian Stock Exchange (NSE), Jingdong Hua, the vice-president and treasurer of the IFC, said the market was gathering pace and was attracting the interest of a range of international investors. The IFC issue gave foreign buyers the opportunity to access the Nigerian market, while giving them the reassurance of doing so through an international institution. It is expected to pave the way for more issuances by international bodies.

Hua said the IFC notes would help boost the Nigerian bond market through lowering transaction costs and would also encourage domestic companies to link to fixed-income investors to raise capital. While economic growth in sub-Saharan Africa has proved robust in recent years, businesses generally have a difficult time accessing the financing they need to expand.

The IFC issue is the latest milestone in the development of Nigeria’s bond markets. In October 2012 Nigeria was included for the first time on JP Morgan’s emerging market Government Bond Index, considerably raising the profile and accessibility of Nigerian debt issues. The country’s admission could attract up to $1.5bn of new capital, according to international press reports. In March 2013, the UK-based bank Barclays is due to add Nigerian paper to its local-currency government bond index.

Partly as a response to the JP Morgan move, yields on Nigerian government bonds due to mature in 2022 have fallen 97 basis points to a record low of 11.01% so far in 2013, according to the Financial Markets Dealers Association. Yields over South African dollar debt, regarded as some of the safest on the continent, have also narrowed, reflecting rising confidence in Nigeria’s economic future and stability.

Nigeria has one of Africa’s larger local currency bond markets – with $37.4bn listed by the end of 2012 - but it is currently dominated by government debt. The corporate market is small, and largely features issues by banks.

However, the corporate bond market is slowly on the rise across Africa, and the rising profile of Nigerian bonds may encourage more local companies to issue paper.

“In Nigeria the government bonds market has been functioning for a decade and the corporate market is starting to take shape,” Hua said. “It is timely that JP Morgan and Barclays are including Nigeria bonds into their global capital market indices. With this, we are putting the Nigerian bonds market on the world capital market map.”

As well as broadening the range of issuers, Nigeria is working on a complementary strategy of opening up its bond market to retail investors. On February 1, the NSE launched the Fixed Income Market Making (FIMM) system, a platform it says will make trading bonds as easy as dealing in shares for individuals. FIMM allows retail investors access to the NSE’s trading systems, providing them with real-time information on bonds and trading, and giving them access to secondary markets for public and corporate paper. The platform is expected to boost liquidity and enhance transparency.

Retail involvement in bond markets is fairly new in most of the world, and the NSE’s commitment to FIMM indicates that it is serious about broadening participation in its bond market.

Nigeria’s bond market has been developing in leaps and bounds in recent months, and the IFC’s oversubscribed issue is an indicator of investor optimism and enthusiasm. The next step will be to encourage more local companies to take to bonds to raise capital and build up a broader base of liquidity.

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