Nigeria: Fixed-income market boost

A recent move by the Asset Management Corporation of Nigeria (AMCON) to list its N1.68trn ($10.85bn) bond on the Nigerian Stock Exchange (NSE) will give a boost to the country’s emerging fixed-income market.

AMCON was established last year to recapitalise troubled lenders that had been rescued by the government during the 2009 bank bailout. The goal of this quasi-government agency is to buy up bad loans from Nigeria’s banks, freeing them to deploy this stranded capital as part of a wider effort to increase lending to the private sector. In November 2010 the central bank said in a statement that AMCON would purchase in total some N2.2trn ($14.2bn) of non-performing loans.

There was some question last year as to how AMCON would value the assets to be purchased. After initial meetings in 2010 AMCON said that unsecured non-performing loans – about a tenth of the total – would be valued at 5% of principal. In November AMCON announced its valuations for margin loans, which account for about half of the bad loans. For loans with other forms of collateral, AMCON said that it would accept bank valuations of the collateral as of November 15, but would reserve the right to check later.

Rather than give cash to the banks in return for their bad loans, AMCON pays them in bonds. The organisation initially lacked the approval to issue tradable bonds, so last December AMCON acquired the non-performing loans of 21 banks in exchange for “consideration bonds”. Then, on April 6, AMCON completed its N1.68trn ($10.85bn) issuance of three-year, zero-coupon, fully tradable bonds in three tranches. The first N1.15trn ($7.43bn) tranche replaced the consideration bonds. The second N20.7bn ($133.57m) tranche was released as part of a book-building process that opened on April 1. The third N535bn ($3.45bn) tranche was used to acquire non-performing loans from an additional 22 lenders.

The first tranche was priced at 10.125%, while the second two tranches attracted an 11.8% yield. Mustapha Chike-Obi, the CEO of AMCON, told reporters, “We are very happy with the 11.8% yield. We were two times oversubscribed but we cut off the subscription at 11.8% because we felt that was a good yield,” he said.

The AMCON bonds were listed on the NSE on April 21. Emmanuel Ikazoboh, the former interim administrator of the NSE, presided over the listing and told local reporters that it would give investors the opportunity to buy fixed-income securities in addition to equities. “Since both asset classes are not necessarily correlated, holding them in a portfolio can provide diversification for an investor,” he said to the local media.

Oscar Onyema, the director-general of the NSE as of April 4, added that the AMCON bond listing would also deepen the market. “The listing is also a special one and it could not have come at a better time as it will confirm our position that our platform is well equipped for trading in bonds. One of the advantages of the NSE bonds trading platform is price discovery, making pricing highly transparent, and therefore reducing implicit costs,” Onyema told reporters.

Indeed, bond pricing has heretofore been somewhat opaque in Nigeria. Federal government bonds, which represented 89% of the N3.26trn ($21.03bn) of outstanding debt at total face value as of February 2011, are mainly traded over the counter and not on the exchange. As a result, it can be difficult to discern a yield curve. Developing a reliable yield curve – that is, the relationship between bond price and length of maturity – is one of the expected benefits of trading the AMCON bonds on the NSE.

A more accurate yield curve could help revive the corporate debt market in Nigeria, which today is quite limited. Corporate bonds account for only 3% of the total face value of outstanding debt. Increased access to debt markets would likely make expansion easier for Nigerian businesses, which currently rely mainly on bank loans for financing.

Some have questioned whether there is room for corporate bonds in a market that is dominated by government debt. However, Onyema dismissed this concern during his first press conference as director-general of the NSE in May. He noted that, while government debt issues can be large, there is nonetheless substantial potential on the corporate side.

“[W]e do offer trading in corporate bonds and what we notice is that there is not a lot of activity in that market,” he said. “But, there are a lot of capacities right now for companies to come to market with their corporate bonds and be able to trade without being crowded out. I think that there are a lot of people on the sidelines waiting for the market to turn around so as to invest.”

Meanwhile, government regulators are trying to create a framework that will support growth in the country’s debt markets. “Given the importance of the fixed-income market to infrastructural and industrial development, and also as a key asset class for institutional investors such as pension funds and insurance companies, the Securities and Exchange Commission (SEC) is working with various stakeholders to develop a strong bond market,” Arunma Oteh, the director-general of the SEC, told OBG. She added that the SEC has introduced rules that have shortened bond issuance time and improved the price discovery process.

These comments by Oteh and Onyema speak to the larger outlook for the Nigerian bond market. However, the most immediate effect of the AMCON bond issuance has been a decline in interbank interest rates. Since early May, a number of banks have been borrowing from the central bank against their AMCON bonds rather than turning to the interbank bank market to meet their short-term borrowing needs. As a result, interbank rates have fallen.

Borrowing on more favourable terms is a short-term benefit for banks holding the AMCON bonds. However, in the long run, trading this debt on the NSE could create a more accurate yield curve, which could pave the way for a much greater fixed-income market in Nigeria.