Afrinvest Endorses Lagos Municipal Bond

• Afrinvest Endorses Lagos Municipal Bond

Afrinvest Securities Limited, a subsidiary of Afrinvest (West Africa) Limited, has endorsed the Lagos State Municipal Bond.

The investment banking and financial services firm, in a report on Monday, said its recommendations were informed by the company’s valuation perspective and the risk to its valuation.

The firm said, “Given our valuation perspective and the risk to our plausible valuation, we believe it is optimal to invest in the Lagos state bond instrument as the state over time has proven to be a more viable economy accounting for over 60 per cent of economic activities in the country.

“When compared to the Federal Government sovereign bonds, the Lagos state bond instrument appears to be more attractive in terms of credit worthiness and interest rate.”

The government of Lagos State, through the Ministry of Environment, introduced the Cleaner Lagos Initiative in 2016 to manage the waste system. Accordingly, a Special Purpose Vehicle – the Municipality Waste Management Contractors Limited – was incorporated for the purpose of issuing medium-term notes to finance implementation of the CLI.

Consequently, the Municipality Waste Management Contractors Limited is undertaking a five-year N50bn medium -term note programme to be issued in two series. The first series of the programme was opened for subscription on August 14, 2017 with 27 million units of the bond on offer, priced at N1, 000 and 100 per cent par value.

According to Afrinvest, the offer closes on August 25, 2017 and successful subscriptions will be allotted on September 1, 2017.

The coupon rate quoted for the LASG bond instrument was 17.5 per cent, implying a 110 basis points credit spread relative to the Federal Government’s benchmark of similar maturity currently at a rate of 16.4 per cent.

The LASG recently issued a 10-year bond at 17.25 per cent and seven-year note at 16.75 per cent with credit spreads of 75 basis points and 25 basis points, respectively when benchmarked against the Federal Government sovereign bonds.

Afrinvest said, “From a fundamental perspective, we used term structure of the interest rate (on the bond yield curve) to obtain spot rates from six months to five years as discounting factor for our valuation. We also moderated the credit spread to 0.5 per cent in our model and arrived at a discounted price of N96.84 and an implied yield of 18.5 per cent.

“As a result of the medium term note being fully backed by an Irrevocable Standing Payment Order by the LASG and the bond being National Pension Commission-compliant, we note that the probability of default is low and thus recommend the instrument a ‘buy’.”

Lagos is the commercial nerve center of the country, with Internally Generated Revenue in excess of N300bn as at year end 2016. Based on an average annual growth rate of three per cent, it is estimated that the population of Lagos would be over 30 million by 2025. The LASG has been actively participating in the local bond market and has issued series of bond instruments which have been largely successful in the past.

The state recently raised N85bn in bonds in order to fund environmental and infrastructure projects as part of the N500bn bond programme approved by the State House of Assembly in 2016 of which N50bn was raised in 2016. The N85bn was issued in two tranches: N46.3bn was raised with a seven-year maturity at 16.75 per cent while N38.75bn was raised with a 10-year maturity at 17.25 per cent.