Nigeria Content Online

Plans by Nigeria’s
“bad bank” to issue bonds in tranches to absorb bad loans from the
banking system will help limit the impact on the fledgling debt market
but yields and interest rates could still rise.

The newly formed
state Asset Management Company (AMCON) plans to issue zero-coupon bonds
in five tranches to absorb bad loans from nine banks rescued last year
in a $4 billion bailout. The aim is to help recapitalise the rescued
lenders and restore lending in sub-Saharan Africa’s second-biggest
economy. AMCON will issue bonds through the Debt Management Office
(DMO) to buy non-performing loans with a face value of 2.2 trillion
naira ($15 billion), although it has told bankers it expects to pay
around 800 billion naira for the assets.

It will also bring
the lenders’ negative shareholders funds to zero by injecting 1.7
trillion naira, before new investors come in to restore them to minimum
capital adequacy levels.

AMCON plans to
issue a 3-year zero-coupon bond, the first tranche of the series, by
the end of the year and replace it at maturity with a 7-year bond.
AMCON bonds will have the characteristics of sovereign bonds and can be
discounted by the central bank for cash. “The first 25 percent of the
bonds issued to the banks can be discounted with central bank, and the
balance traded for liquidity at the over-the-counter market (OTC),”
Vetiva Capital said in a note to investors following a meeting with
AMCON. Brokers said AMCON had consulted on the impact of issuing such a
large amount of bonds. The decision to issue them in tranches will
stagger the impact on the debt market, which is still largely dominated
by government bonds. “Actual asset purchases will only be in the region
of 0.8 trillion naira, so liquidity impact once the AMCON gets going
(is) more muted,” said Razia Khan, head of Africa research at Standard
Chartered Bank. Nigeria has raised just over 1 trillion naira in
government bond issues over the past 10 months.

Pressure on yields

Some analysts see
the impact on the debt market as limited because AMCON will raise bonds
to buy non-performing loans from banks which could then sell the bonds
for cash, meaning that the liquidity remains within the banking system.
“Even though money is being raised from the system, the bulk of that
money would go back to the system,” said Sonnie Ayere, head of
Lagos-based investment bank, Dunn Loren Merrifield.

But other analysts say AMCON’s activities could raise bond yields
and interest rates, with pension funds and banks lacking the levels of
liquidity needed to absorb such a large issuance. “If all the banks
decide to sell AMCON instruments to the market at once, it remains to
be seen whether the absorption capacity would actually exist,” said
Samir Gadio, emerging markets strategist at Standard Bank. If the
supply of bonds increases sharply without a corresponding increase in
liquidity to absorb, yields and interest rates could rise. “In the
absence of the central bank increasing liquidity in the system, an
increase in bonds through AMCON in the market place will increase
interest rates,” said Malcolm Gilroy of investment firm Afrinvest West
Africa.