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While many firms
could hardly raise cheap capital to run their businesses last year, the
state and federal government had a field day accessing funds from the
bond market. Since the stock market crisis which began in 2008, many
believed that the bond market would provide a more reliable avenue for
firms to raise capital.

But that was not to
be. In addition to forays by the federal government, five state
governments, namely Bayelsa, Ebonyi, Kaduna, Niger and Lagos all raised
various sums to meet their developmental needs. The private sector was
not so lucky. Apart from United Bank for Africa and Guaranty Trust Bank
which raised N20 billion and N13.162 billion, UAC Properties raised N15
billion while C & I Leasing raised N2.24 billion. Other firms that
planned to venture into the bond market eventually had to shelve the
plans as market sentiments did not tilt in their favour. The
alternative for these firms was bank borrowing which added to the cost
of business.

On the other hand,
the Debt Management Office (DMO), on behalf of the federal government
raised over N1.1 trillion from the domestic bond market last year. With
plans by the DMO to raise N186.5 billion in the first quarter of this
year, the private sector may yet again be at the receiving end in 2011.
The Debt Office plans to raise N66.5 billion next Wednesday and another
N60 billion in March. This capital raising plan by government, compared
to N5 billion raised by Food Concepts Limited last week already sets
the tone of what to expect in the bond market this year.

Government has been
blamed for crowding out the private sector from the bond market, a
claim often countered by the director general of the DMO, Abraham
Nwankwo, who insists that the government is in the bond market in order
to develop it sufficiently for the private sector to thrive. Mr.
Nwankwo said the goals of the office is to develop the domestic bond
market to enable the private sector access long term funds to develop
agriculture, mining, solid minerals, transportation, manufacturing,
power. “Now, there are funds of up to 20 years in the Nigerian capital
market, through the issuance of FGN bonds. Today, if any private entity
wants to issue a bond to raise five, seven, 10, 20 years money for
investment in agriculture, manufacturing, power sector or other
infrastructure will succeed,” he said in an interview last week.

Mr. Nwankwo said
Nigeria’s debut $500 million Eurobond which was subscribed by 150 per
cent was part of government effort to encourage the private sector to
tap into the international bond market. “Government desires an active
role by the private sector in this direction. What government has done
through the Eurobond issue is to open a new window to facilitate
Nigeria’s private sector to go into the international capital market to
issue their own debt instruments and raise long term monies to fund the
country’s various needs in the real sector and infrastructure.”

However, not many
operators share this outlook. “The sustained expansion in public
borrowing risks crowding out the private sector,” said the interim
administrator of the Nigerian Stock Exchange, Emmanuel Ikhazobor, in
his presentation at a press briefing on the review of 2010 and the
outlook for 2011, held last month in Lagos. Mr. Ikhazobor noted that
the international and Nigerian capital market would be very busy this
year as the federal government and various government agencies source
funds from both markets.

Tola Odukoya, an
analyst at Dunn Loren Merrifield, an investment firm in Lagos is also
optimistic that the corporate bond market will fare better this year.
“We anticipate a strong growth trajectory for corporate bonds on the
back of the revised Pencom guidelines and the success of the corporate
bonds issued in 2010. From our standpoint, over N30 billion will be
raised from the market via corporate bonds in the first half of the
year.”

Unchanging trend

This enthusiasm is
not totally shared across the industry as some operators are still
skeptical, given the huge funds raised by government last year. Akin
Oladeji, chief executive officer of Futures and Bonds Limited, a
financial services firm, said the trend may not change much this year.
“The market will not be different from previous years since FGN has
devised a crafty way of raising bonds to finance its projects. WMarket
will continue to be crowded with FG and State Bonds.” Mr. Oladeji said
attraction of the corporate to the bond market will be determined by
interest rate. “If the usual high lending rate and low deposit rate
should continue, most corporate organisations will consider bond
issuance subject to their existing allowable debt to equity ratio.”

Mr. Odukoya said
the corporate bond market has its attraction as many firms may need to
restructure their debt portfolio and may see the bond market as an
alternative. “Our optimism stems from the obvious need for most
corporates to restructure their debt portfolios, which for the most
part are expensive and short tenured in nature.” Mr. Nwankwo, however,
said government was not unaware of the need not to crowd-out the
private sector and that government is creating space for private sector
in the flow of credit. This may account for the drop in government
activity as shown by the DMO’s issuance calendar. While N186.5 billion
is planned for the first quarter of this year, N238.5 billion was
raised during the same period last year, a 21.8 per cent reduction.