Encouraging corporate issuance on primary and alternative exchanges

With issuance on the primary market remaining far below the levels seen during the heydays of the mid2000s, attracting new supply will be key if the Nigerian Stock Exchange (NSE) is to meet its goal of a $1trn market capitalisation by 2016 – up from N12.14trn ($74.05bn) in early April 2015.

NSE management has mentioned some 500 firms in which it sees potential for listing, despite modest results in recent years. Equity raising has taken the form of secondary rights issues by already listed firms, as well as listing by introduction rather than through initial public offerings (IPOs). Nonetheless, both the regulator and the exchange see significant potential in underrepresented sectors like oil and gas, power and telecoms, and have streamlined regulations to facilitate dual listings. The dual listing of Seplat, a leading indigenous upstream oil and gas operator, in early 2014 has raised significant hopes for a pipeline of such issues.

Track Record

The NSE saw the number of new listings peak in 2006, at 62 IPOs, 10 public offerings and seven rights issues, before declining gradually to five IPOs, 22 public offerings and 20 rights issues in 2007 and 21 IPOs, four public offerings and five rights issues in 2008, according to data from the NSE.

As the market slowed in 2009, on the back of the effects of the domestic banking crisis and the global economic slowdown, the IPO pipeline remained relatively sluggish until 2013, though the exchange did host 14 public offerings in 2009 and four in 2010, but none in 2011 or 2012 – indeed, these two years saw no listings at all. The single largest issue since 2009 – when Dangote Cement sold 5.2% of its equity for $154m in October 2010 – was a listing by introduction (or public offering), rather than an IPO. Listings by introduction do not raise new equity or issue new shares for a firm, thereby avoiding the need for book building by underwriters, but rather list shares already in circulation, usually over-the-counter.

“Virtually all the companies listed on the NSE went public because the government forced them to,” Egie Akpata, head of capital markets at UBA Capital, told OBG. “In fact, there have been more delistings than listings in the past decade.” In the decade to first-quarter 2013, there were some 63 delistings from the exchange, including seven voluntary suspensions, 47 regulatory actions and nine delistings due to restructuring of the business. This caused the number of listed firms to slump from 214 in 2002 to 192 by 2012, according to the NSE, though less than half of these are actively traded. In 2013 there were six delistings for one IPO and nine rights offerings. In 2014 there were six delistings, one IPO and 11 secondary rights issues. As of April 2015 there were 197 equities listed on the bourse.

The reasons vary from challenging economic circumstances, as in the case of film producer Poly Products, to restructuring, as for First City Monument Bank’s delisting and the relisting of FCMB Group following new central bank holding group rules.

The latest delisting came in January 2015 when Cappa & D’Alberto voluntarily delisted from the stock exchange. This followed the voluntary delisting of five companies in November and December 2014 and one delisting due to an acquisition in December.

Reforms

 NSE management has sought to streamline rules and costs for listing to attract new issuers, although it has also brought in new minimum requirements for listed firms in a bid to improve the market’s liquidity and transparency. In March 2012 the stock exchange implemented new minimum standards for listed companies, requiring a minimum float of 20% (with an exception for firms, like Dangote Cement, valued at over N500bn [$3.05bn]); five years of financial statements and operating records; and compliance with International Financial Reporting Standards.

Although the NSE proposed significant revisions to the listing rules in 2013, they are pending regulatory approval by Nigeria’s Securities & Exchange Commission. The stock exchange is also seeking incentives from the Federal Inland Revenue Service. “We continue to advocate for appropriate tax incentives to encourage more listings, and potentially punitive tax measures for systemically important companies that refuse to list,” Oscar Onyema, CEO of the NSE, told OBG.

The exchange has also sought to promote listings from small and medium-sized enterprises (SMEs) by re-establishing an alternative board for high-growth SMEs – the Alternative Securities Market (ASeM). Listing fees have been reduced to a flat N100,000 ($610) for new or additional issues and N200,000 ($1220) per year for listed firms, compared to a rolling scale from N200,000 ($1220) to N4.2m ($25,620), depending on the firm’s capitalisation, and 0.3% of equity issued. Meanwhile, firms need to show two years of financial statements.

The NSE has also worked with the SME Development Agency and Thompson Reuters to provide advisory services to potential issuers. The ASeM has yielded modest results since its launch in April 2013, with no new listings in its first year, although this is hardly surprising given the performance of alternative boards elsewhere in Africa, such as Morocco (see analysis). The exchange also sees potential in attracting dual listings and revised its systems in late 2013 to allow for seamless trading of stock across exchanges, both onshore and offshore. “We have made significant back-end improvements to support fully fungible dual listings, where you can take a position in Lagos and sell out in London, for instance,” Onyema said.

Recovering Momentum

The provisions for dual listings are particularly noteworthy, as they allowed for one of the largest issues on the exchange in recent years in early 2014. The first IPO in three years came in July 2013 with the real estate investment trust (REIT) of UACN Property Development Company, a N30bn ($183m) closed-end collective investment trust.

In November 2013 the Computer Warehouse Group listed shares from a private placement in 2009, which had valued the company at N6.97bn ($42.52m), on the NSE’s main board, adding N14bn ($85.4m) to its capitalisation. The issue was oversubscribed with the already majority shareholder, private equity firm Aureos Capital, buying the lion’s share. Infinity Trust Mortgage Bank listed 4.17bn of its N0.5 ($0.0031) shares on the exchange at N1.5 ($0.0092) apiece in December, adding N6.26bn ($38.19m) to the market’s capitalisation.

Thus, firms listed by introduction will subsequently be able to stage secondary rights issues, which were already the locus of activity in 2013. “We saw a lot of secondary rights issues in 2013, as firms needed to raise equity but did not want to dilute existing shareholders,” Akpata told OBG. Mid-tier banks like Sterling and Unity have staged rights issues, while others have floated subordinated debt issues to shore up their Tier-2 capital in 2013 and early 2014. This mezzanine financing structure is increasingly evident in the upstream energy and power sectors, while Diamond Bank, UBA Capital, Africa Prudential and May & Baker all announced plans for additional rights issues in 2014.

Energy Listings

The largest equity raising exercise took place in April 2014, when indigenous oil and gas firm Seplat raised £300m and N82.5bn ($503.25m) in the first dual listing of a Nigerian oil firm, on the London Stock Exchange (LSE) – structured by BNP Paribas, Standard Bank, Citi and RBC Capital – and the NSE, by Renaissance Securities and Stanbic IBTC. The combined 25% free float valued the company at £1.14bn, the largest listing in sub-Saharan Africa since Dangote Cement’s, with some 48% of funds raised coming from Nigerian shareholders, a testimony to the significant capital base and appetite of the country’s investors.

The listing raised the oil and gas sector’s share of capitalisation from 2.6% to 5.9%, though this remains far below the industry’s weight of 14.4% of rebased GDP. However, NSE management expects that as local oil firms continue to expand their share of oil output and raise funds for their respective work programmes, they will increasingly turn to equity markets, both onshore and abroad. “Foreign equity markets will remain important sources of capital, particularly following asset acquisitions,” Ecobank noted in an August 2013 report on Nigerian oil firms. The LSE has been a particular draw for Nigeria-focused firms, such as Afren, Lekoil, Heritage Oil, Mart Resources, and Eland Oil and Gas, as well as leading integrated oil and gas firm Oando, which is triple-listed on the NSE, the Johannesburg Stock Exchange and, since 2012, the Toronto Stock Exchange.

There are also driving factors for firms involved in Nigeria’s power privatisation process to raise equity. For instance, the Transnational Corporation of Nigeria, which holds stakes in oil blocks and power plants, aims to raise up to $1bn in new debt and secondary rights issue in 2014 to fund its new power projects. However, with roughly $2.7bn of the $3.2bn spent on privatised power generation and distribution assets in 2013 consisting of bank debt, according to Stanbic IBTC estimates, power investors may have to balance their debt-to-equity mixes to fund capital investment programmes.

Although the NSE recently hosted a number of important new listings, it will need to attract more large issues if it is to reach its capitalisation goals by 2016. Fiscal incentives from the government would help, as would a larger appetite for equity financing relative to debt.