Investing in Nigeria’s fixed income assets

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Bonds and fixed income assets remains very popular amongst foreigner and domestic investors. The high interest rates are driving away most interest from the equities and to the fixed income assets.

Some people have empathized the fact that it’s not particularly the Africa’s economy that’s rising, but rather the Africa’s debt. In Nigeria’s instance, the total debt to GDP ratio is around 30%, 75% of the debts are also long term, giving plenty of room to borrow more.

There is an appetite for Nigerian debt in the world’s financial hubs. Nigeria also benefits from the option to raise money in the Islamic Bond market, where the interest rates are lower. This is especially important due to the fall of oil prices, as even though there is interest for Nigerian debt, high interest rates in the Euro bonds are expected.

The government is currently retiring domestic bonds, it’s reflected in the budget – $4.25bn has been allocated yearly to retire bonds. The number of domestic listed bonds fell from 55 to 52 in 2013 and 2014. The government can get better rates in the offshore markets – in January 2011 the country issued $500m in a 10 year bond at a coupon of 6.75%. Depending on one’s assumptions about where the Naira will stabilize, this might provide a great opportunity in investing at the domestic two digit return bonds.

Generally, businesses prefer debt over equity due to various reasons, such as lack of structure and emotional ties to the business. Corporate’s issuing bonds remains a low popularity choice however – that is to be expected with the safe federal governments bonds paying two digits. The big multi nationals can raise their debts in the markets abroad, such is the case with Dangote Group. Banks have a tendency to only raise their tier-2 capital by bonds, as they have access to the cheaper option of deposits. As of the end of 2014, the corporate bond cap was at $723mn. There is a level of corporate debt restructuring happening as well.

There have been 20 bond issues by 15 states, they have raised a total of $2,74bn. The coupons varies from 13.5% for Lagos to 15.5% for Bauchi states. Lagos state enjoys lower interest rates due to its perceived image as a business hub and the internal revenues it creates. State bonds are guaranteed and observed by the federal government. African government debt is generally used at keeping the electorate happy – to hire and pay bonuses to the military, civil servants and police.

One of the biggest opportunities in the debt markets is the massive infrastructure deficit – huge infrastructure and housing projects are going through. The real estate bonds might see a lot of demand in the capital markets, as most other bonds are traded OTC.

There is little to non-existing activity in the secondary bond markets, this remains the biggest issue with liquidity. If bonds are to be bought, they will be held for a long time.

There is an opportunity with treasury bills. Treasury bills are issued in 3, 6 and 12 month periods with bi-monthly auctions. In 2012 and 2013 around $22bn of T-bills were issued. The statistics are not yet available for 2014, but the first half saw $13.6bn issued.

If Nigeria is able to increase the overall demand for fixed income assets, the interest rates might come down and more issuances will be seen, as there is more demand for them. This was already witnessed when in 2012 foreigner investors expanded their market share in the fixed income assets. A CBN’s lift of a 1 year minimum holding also saw an increased interest – investors don’t want to be forced to hold their fixed income securities in case the US interest rates goes up. If the US rates did went up, the Nigerian government would be forced to increase the interest rates as well.