Nigeria Content Online

Some market operators have expressed
divergent views on what appear to be a race to issue bonds by some
states at the Nigerian capital market.

In the last eight months, Ogun, Bauchi,
Kano, Kwara, Niger, and some other states have all shown interest to
issue bonds before the end of the year.

While some states are still struggling
to meet the requirements for bond issuance, with states like Ogun
currently battling with the legality of its legislative support for
bond, other states like Bayelsa, Ebonyi, and Kaduna have already got
the approval of the council of the Nigerian Stock Exchange (NSE) to
float N50 billion, N20 billion, and N8.5 billion respectively. Last
year, Lagos State raised N50 billion in its first tranche bond and it
was oversubscribed by N8.9 billion.

Some of the bond requirements include:
the submission of the state’s audited accounts for the preceding three
to five years; a favourable credit rating report; a feasibility report;
and an irrevocable Standing Payment Order.

However, while some analysts believe
the rush for bond is worrisome because many of these state governments
have few months left for their administrations to end, hence, the
opportunity to channel the money raised to other purposes, others say
since the utilisation of proceeds from a bond issue is predetermined,
state governments need the funds to achieve their various developmental
plans for the state before they leave office.

David Amaechi, an executive member of
the Shareholders Association of Nigeria, said although the bond market,
a debt instrument platform, has always been an avenue for states to
raise developmental funds, “the present rush to issue bonds, especially
when next year’s election is fast approaching, shows there are hidden
agendas for the funds.”

Mr. Amaechi said bond issuance will
also increase the debt profile of a state and “this will be a burden
for the incoming government.”

“The only assurance investors have on
such bonds is that return on investment is guaranteed. Government bonds
are risk free, even when the purpose for the fund is not achieved,” he
said.

Meanwhile, Bola Oke, finance analyst at
WealthZone Company, an investment firm, said state governments are only
trying to take advantage of the bond market following the continuous
loss of confidence at the equity market.

Ms. Oke said many states approached the
bond market because it is “a safe place” to supplement the low
allocation they get from the federal government.

“State governments will always seek for
more funds since there are several projects to be done. And investors
shouldn’t worry about their money because these funds are fixed income
securities. The cash-flow from them is fixed,” she said, adding that
state bonds are good investment outlet to portfolio managers.

Ikazoboh’s advice

Emmanuel Ikazoboh, the interim
administrator of the NSE, has advised market operators to invest in
fixed income securities to lower their risk exposure in the market.

“Awareness is gradually rising
regarding investments in bond as many state governments and corporate
entities have applied to raise funds on the market via bonds. It must
be noted that investment in bonds guarantees a fixed income. Until the
late eighties, the bulk of investment through the Exchange was in debt
securities, before equity investments took the centre stage,” Mr.
Ikazoboh.

As part of the Exchange’s commitment
toward encouraging more investments in government bonds, the NSE
council, in January, 2010, reduced transactional charges on bonds.

“Investors should take advantage of the
fee reductions to include fixed income securities in their portfolios.
It is heartwarming to say that the Exchange’s trading platform is
effectively configured for trading bonds,” he said.

Bond preconditions

In the meantime, Afrinvest West Africa
Limited, an investment bank, in a report on bonds, said a
well-functioning bond market requires some preconditions. Some of which
are: a reliable regulatory framework, an efficient market
infrastructure, effective corporate governance culture, a functioning
sovereign bond market that provides corporate and a stable and liquid
benchmark curve in local currency, and a developed credit culture.

According to the report, “accessibility, transparency, and liquidity
are also essential preconditions for ensuring that the Nigerian bond
market plays a meaningful role in the country’s economic development –
funding pressing infrastructure investment needs, financing government
deficit spending at both national and sub-national levels,
strengthening bank balance sheets, and supporting capital investments
in the private sector.” </