Nigeria's new bond issuances reflect increased market diversification

Nigeria’s latest bond issuances reflect the market’s shift away from government debt towards alternative funding instruments, such as infrastructure and green bonds, some of which may come with sovereign guarantees that partially cover default risks. For example, Abuja plans to use eurobonds more frequently for its funding needs, which is likely to lower its cost of finance as well as leave the rest of the market to other would-be issuers. The future is expected to feature a greater diversity of available securities.

Pension

Nigeria’s bond market is built on the back of its growing pension funds. Various schemes had amassed N8.3trn ($26.8bn) in assets under management as of August 31, 2018, according to the National Pension Commission. These pools of risk-averse capital have generated demand for government bonds, but the strong preference for those instruments has left little room for other types of the asset class, Layi Olaleru, managing director and head of financial advisory at local ARM Securities, told OBG. At the end of August 2018, 69.3% of pension funds were invested in government bonds. A regulatory change that mandates pension fund managers offer lower- and higher-risk alternatives could encourage pension money to flow in new directions, such as equities and other types of fixed income. “There are large chunks of people’s money just sleeping,” Olaleru said. “More pension funds in the equities market will help the crowding-out effect.”

Infrastructure

The allocation rules for pension funds prevent managers from investing directly in infrastructure projects, creating a niche market for infrastructure funds. Nigeria’s first corporate infrastructure bond was issued in January 2018 by Viathan Engineering, a local firm that builds small-scale, off-grid power facilities. The N10bn ($32.3m) bond is set to mature in 10 years and offer a yield of 16%. As of January 2018 Viathan had a generation capacity of 50 MW.

Investment advisors from InfraCredit, a local financial guarantor, aim to lower the risk of infrastructure projects to attract further indirect investment from pension funds through sovereign guarantees. InfraCredit is a joint venture, with $25m in funding from the Nigerian Sovereign Investment Authority and an additional $75m in callable capital from GarantCo, a multilateral fund supported by the governments of Australia, the UK, Sweden, Switzerland and the Netherlands.

Sukuk

For the federal government, leaving more room for others to court Nigerian bond investors with domestic currency issues does not mean a complete departure from the market. The federal government issued N100bn ($323.3m) in sukuk (Islamic bonds) in September 2017, marking Nigeria’s first-ever sale of a non-interest bearing fixed-income alternative to bonds.

Payment of interest is banned by sharia law, and sukuk were developed as a way to give investors a fixed return on their investment using an alternative structure that is compliant with the religion. The success of the first Nigerian sovereign sukuk, which was oversubscribed, having attracted a total of N105.9bn ($342.4m), appears to have set the stage for more issuances, and in October 2018 the federal government announced that it had approved the issuance of its second sukuk, also worth N100bn ($323.3m).

Green Bonds

Nigeria is the first country in Africa and the fourth worldwide to issue a green bond, worth N10bn ($32.3m), the proceeds of which are intended to fund projects that seek to reduce carbon emissions. The bond was issued in 2017 and labelled “green” by Climate Bonds Initiative, a certification scheme that aims to classify debt securities in the same way the Fairtrade label can be applied to coffee, food and clothing.

Additionally, the government is planning the sale of a second green bond, worth N150bn ($485), to be completed by the end of 2018. The Securities and Exchange Commission announced in June 2018 that it was developing a regulatory framework to encourage further green bond issuances in Nigeria; however, as of October 2018 the rules had not yet been released.