IFC Bond To Boost Nigeria’s Markets

Nigeria’s capital markets received a filip in October when the country was admitted to JP Morgan’s emerging market Government Bond Index, a move that that could potentially attract $1.5 billion of new capital inflow into the country. Now there’s some more good news for sub-Saharan Africa’s second biggest economy, and this time it is the thinly-traded corporate debt market which stands to benefit.

The International Finance Corporation, the World Bank’s investment banking arm, is getting ready to launch a five-year naira-denominated bond, aimed to develop local capital markets.

The auction will be “imminent” after the supranational winds up roadshows in Abuja and Lagos on Wednesday, Jingdong Hua, vice president and treasurer at IFC told beyondbrics.

At $50m this will be a small issue, designed to finance local private sector investments. But it is also the first by a non-resident issuer in Nigeria’s domestic market, and IFC is expecting some big results.

Specifically, the note should help develop the local market through reduced transaction costs and a streamlined issuance process, encouraging domestic businesses to tap fixed income investors for much-needed finance, Hua said.

“We have worked with underlying regulators to start putting the pieces of the puzzle in place,” added Andrew Cross, IFC’s principal financial officer. “Nigeria’s SEC has already made a number of amendments to its fee structure, which has certainly improved the process, because historically one of the impediments to issuances can simply be the cost of doing it.”

Nigeria boasts one of the region’s largest local currency debt markets, but most of the $35bn of listed naira-denominated bonds are issued by the government, with corporate debt largely restricted to the country’s banks. In 2012 there was only one local bond from a private issuer: a $2.5m note from Citi. Overall, the Nigerian corporate bond market accounts for only around 1 per cent of GDP.

Deeper local debt markets would benefit African businesses, which despite a period of sustained economic growth continue to face huge financing constraints. “All that businesses want is to borrow money efficiently without worrying about foreign exchange risk. Access to local currency is what they need,” Hua argued.

Triple-A rated IFC has previously issued in Moroccan dirham, South African rand, and both West and Central African CFA franc, and has raised $850m from locally-denominated bonds in the last five years.

Last May it launched a pan-African bond programme to form multi-year agreements with governments to allow it to issue local-currency paper over a period of years. The setup should prevent IFC from having to seek repeated approval each time it sees a market opportunity.

Since then, Ghana has approved local currency issuances worth the equivalent of $1bn over the next 10 years, and IFC is seeking regulatory and government approval to start the programme in Nigeria. More will follow: “We are close to agreements with eight or nine countries,” Hua said.

As for the Nigerian bond, it’s targeted at local banks as well as international investors. But the big interest is likely to come from Nigeria’s 21 growing pension funds, which are diversifying their fixed income holdings under revised regulations.

And as far as local currency market developments go, there are tentative reasons to be positive. According to a new paper from the International Monetary Fund, corporate bond market capitalisation for sub-SaharanAfrica has grown as a share of GDP to 1.8 per cent in 2010, from 1 per cent in 2006. Meanwhile, the share of corporate bonds in total bonds has doubled from just 5.1 per cent in 2006 to 10.8 per cent in 2010.

The increasing number of supranationals issuing debt in the region might just help that trend on its way.

Source: Financial Times