The Nigerian capital market has had an autonomous existence since 1960 when on independence from the UK, the Lagos Stock Exchange took over some of the capital-raising functions previously exercised in London. Later renamed and reconstituted as the Nigerian Stock Exchange (NSE), it has been the focal point of Nigeria’s capital market ever since.
In contrast to the era of military misrule, during the two Obasanjo administrations – and in large part due to the reforms the government has introduced – the Nigerian capital market has become increasingly effective at mobilising long-term funds for investment. Besides its Lagos headquarters, the NSE now operates trading floors in Port Harcourt, Kaduna, Ibadan, Kano and Onitsha, listing more than 280 companies with a combined market capitalisation exceeding N5,500bn ($44bn). The NSE, like all other aspects of the capital market, is regulated by the Nigerian Securities and Exchange Commission (SEC).
Over the past year, the NSE All-share index has risen by more than 70% and growth in market capitalisation has been even more impressive. With a stock value of N382bn, First Bank of Nigeria is the largest listed company by market capitalisation, followed by Nigerian Breweries with N297bn, United Bank for Africa (UBA) with N279bn, Zenith Bank with N266bn and Union Bank of Nigeria with N218bn.
In January, 5.63bn shares worth N86bn were traded on the NSE, double the value of trades in December and pushing up the All-share index by 10%. More than four-fifths of all transactions were in banking shares, emphasising the recent dominance of this sector since consolidation and illustrating the success of the CBN’s reforms.
Nearly half of all trading by value was in the shares of five of the largest banks: 16% in UBA and 5% in Oceanic Bank – both driven by high declared dividends and scrip issues – along with 11% in Wema Bank, 7% in Fidelity Bank and 5% in Afribank Nigeria. The latest major equity offering on the exchange is Unity Bank, whose 14.7 billion reconfigured shares began trading in January at a launch price of N7.50 each.
Pensions Reform Act
By boosting historically low national savings rates and with the $25bn pensions market forecast to grow at 15% annually, the 2004 Pensions Reform Act has ensured the injection of a large tranche of long-term money into the capital market. The act – which establishes for private- and public-sector employees a uniform, contributory, fully funded and almost universal pension scheme – mandates contributions of not less than 7.5% of employee emoluments to be made by both employee and employer.
Supervised and regulated by the statutory Nigerian Pensions Commission, it provides for the investment and management of pension funds by licensed private sector fund administrators and thus, besides the direct impact of funds injection, is expected to drive the development of domestic asset management expertise.
Bond markets
In 2000, in a bid to bring under one roof the unco-ordinated and ineffective debt management functions of various government organisations, which had allowed debt to rise to unsustainable levels under the previous military regime, the government established the Debt Management Office (DMO). The DMO is charged with raising funds to meet government deficits over the medium- to long-term.
The first issues under DMO auspices were the Federal Government of Nigeria (FGN) bonds series in 2003. The three-year bonds, carrying a 17% coupon, were 86% oversubscribed, while the five-year bonds drew a 31% subscription for their 18.25% coupon. The seven and 10-year bonds had coupons of T-Bill plus 3% and T-Bill plus 3.75% respectively, though neither drew much interest from the market.
Nevertheless, the series raised N73bn and, besides enabling the government to finance debt in line with market discipline, also provided a benchmark for future bond issues by state governments and corporations.
A more successful outcome was achieved when the second series of FGN bonds were auctioned in 2005. With two- and three-year maturities and coupons ranging from 8% to 17%, they were 133% oversubscribed. Most of the N178bn proceeds went towards restructuring 91-day Nigeria Treasury Bills (NTBs), to guard against rollover and interest rate risks that had burdened the government under the previous uneven weekly issuance programme and to decrease volatility in the short-term market. Infrastructure projects in power, water, health, education and transportation absorbed the remaining one-seventh of the debt.
Having issued a third FGN bonds series in 2006, with maturity dates ranging from 2009 to 2013 and coupons of between 12% and 16%, the latest government bonds to be floated, in January and February, are the fourth FGN bonds series, offering coupons of 10.75% over three years and 9.5% over five years. Each series aimed to raise N40m and both were about 200% oversubscribed. A further tranche with seven-year maturity will be offered in March, with proceeds being used to fund the projected N200bn budget deficit in 2007 and to refinance 365-day NTBs and the maturing second FGN bonds series, whose redemption falls due in August to November this year.
To date, the DMO has issued 26 series of FGN bonds, plus various special issues to cover pension arrears and local contractor debt, with a present market capitalisation of about N620bn. Banks absorbed between half and two-thirds of each new issue and are leading participants in the secondary market, along with pension fund administrators and stockbrokers.
In 2006, in order to boost the secondary market, 15 financial institutions were selected as primary dealer market makers (PDMM) and have since taken up all auctioned issues. Among the PDMMs are 10 leading banks: Access Bank, Citibank, Fidelity Bank, First Bank of Nigeria, First City Monument Bank, GT Bank, IBTC/Chartered Bank, Stanbic Bank, Standard Chartered Bank and UBA.
As to the future, the DMO plans to install an automated trading system and will consider launching index-linked or floating rate bonds as well as buy-backs, reverse auctions and switches.
State bonds
Unencumbered by international debt renegotiations, various state governments were quicker off the mark than the government in seeking debt financing in the market. Leading the way was Edo State, whose revenue bond in 2000 was fully subscribed, raising N1bn. Delta State soon followed with an ambitious N5bn issue that was nevertheless fully subscribed. Subsequently, several other states, including Ekiti, Akwa Ibom and Yobe with their respective floating rate revenue bonds, and Lagos State with a huge N25bn issue, entered the market.
In the seven years to date, various states have raised N38bn from the bond market, with funds typically earmarked for infrastructure and education projects. State issues have generally been well received, though may have been squeezed recently by the volume of FGN new issues available.
Corporate bonds
Corporate bonds have yet to match the new-found confidence in government bonds and have struggled to recover the buoyancy they enjoyed through the 1980s, with only 11 in the market from 1999-2006, compared with 99 from 1980-1994; and just three, worth N23bn, approved for issue in 2006. In part this is because the capital market regulatory framework is now more robust than under previous regimes, albeit still unattractive in the view of many potential issuers.
Chairman of the SEC, John Edozien, argues that there is an urgent need to generate sustainable large volumes of long-term capital through the capital market. “The corporate bond market offers very good prospects in this regard,” he says. “On the part of government, through its reforms, the foundation has been laid for its successful take-off.” Yet he remains frustrated by the slow rate of new corporate bond issues. He also expresses disappointment at illiquidity in the secondary bond market, improvements to which, he points out, are essential if investor confidence in subscribing to new corporate bonds issues is to be developed.
Concerned by the dormancy of the market, the government has adopted a policy of issuing securities at regular intervals since 2005 in order to establish regular benchmarks for corporate bond issues. However, an SEC-sponsored summit in November 2006 concluded there were still several key areas that needed improvement if the market was to grow, with the high costs of launching new corporate bonds identified as a major disincentive.
In the past, this has prompted companies to rely on short-term loans for long-term projects. “The prevailing over-dependence by the private sector on short-term capital that is both inadequate and inappropriate has been the bane of the country’s economic development,” says Mr Edozien.
Summit participants called for a revised corporate bond-friendly federal tax regime and suggested corporate bonds be traded on an over-the-counter basis in the manner of FGN bonds. They also identified a lack of suitable qualified professional intermediaries and the inconsistent record of ratings agencies in bond issues as a hindrance to the proper pricing and successful floating of securities.
Such shortcomings signal opportunities for foreign professional services firms to become more deeply involved in the corporate bond sector. With the government bonds market now well proven, brokers expect corporate bonds issuance to take off this year.
