The value of corporate bonds issued by Nigerian companies has dramatically decreased by 98% between the last quarter of 2022 and the first quarter of 2024, according to recent data from FMDQ Securities Exchange Limited.

This significant drop is attributed to high yield demands from investors, reflecting a cautious stance in the lending market.

In the first quarter of 2024, the value of corporate bonds fell to N5.5 billion from N249.4 billion in Q4 2022, marking a staggering N244 billion decrease.

Similarly, the issuance of commercial papers (CPs) by firms also saw a sharp decline, dropping to N331.81 billion in Q1 2024 from N537.47 billion in Q1 2023, representing a 38% slump over the period.

Corporate bonds and commercial papers are crucial financial instruments used by companies and governments to raise capital for various projects.

While bonds typically offer periodic coupon payments, CPs do not provide such payments, making them less attractive in a high-yield environment.

Opeyemi Babalola, portfolio manager at Comercio Partners Asset Management, explained, “Companies are reluctant to take on debt at these levels. When one-year Nigerian Treasury Bills (NTBs) yields are at 25 percent, these companies would have to issue commercial papers at a premium to that.”

He noted that some companies have issued commercial papers at rates above 30%, which is unsustainable for maintaining profit margins.

On the corporate bond side, Babalola added, “There has hardly been any recent issuance because it’s not very prudent for any chief financial officer to advise their company to lock in long-term debt at the current high-yield levels.”

The sharp rise in yields on both government and private instruments in Nigeria’s fixed income market is a result of the Central Bank of Nigeria (CBN)’s aggressive monetary policy stance.

The CBN has been focusing on reducing financial system liquidity and hiking interest rates to curb inflation.

Consequently, the yield on one-year Nigerian treasury bills rose to 26.76% in March 2024 from 9% in January 2024, peaking at 27.33% in March 2024.

To tackle rising inflation, the Monetary Policy Committee, led by Yemi Cardoso, has raised interest rates three times this year by a total of 750 basis points.

This included an initial 600 basis point increase to 24.75% from 18.75% last year, followed by a 150 basis point increment to 26.25% in May 2024.

Several companies, including Afrinvest West Africa Limited, FBN Quest Merchant Bank, UAC of Nigeria, and Coleman Technical Industries Limited, issued CPs in the first quarter of 2024.

These issuers were primarily from the financial services, agriculture, manufacturing, health, pharmaceuticals, and retail sectors.

Another popular financing option for Nigerian companies is bank loans. Currently, commercial bank loan rates range from 30% to 40%, reflecting the high borrowing costs due to the central bank’s policy actions.

Gbolahan Ologunro, portfolio manager at FBNQuest, noted that while it is relatively cheaper for companies to raise funds through bond issuances or commercial papers compared to loans, the macroeconomic environment has reduced the appetite for such fundraising activities.

“The cost has gone up, and the macroeconomic situation does not support such attractive returns on investment, given the high level of cost associated with fundraising activities,” Ologunro said.

The running costs for businesses are increasing, and companies are struggling to raise prices without affecting demand.

“The purchasing power of consumers is declining because of rising inflation. So, it puts these companies in a very delicate position. You will see all these reflected in the earnings of publicly listed companies in the consumer space once we enter peak results season by the end of July,” Babalola added.

FMDQ data shows that corporate bonds’ value declined by 88% to N5.50 billion in Q1 2024 from N43.50 billion in Q4 2023.

Coronation Research predicts that short-term rates for T-bills and commercial papers will remain high for the rest of the year, without causing bond rates to rise significantly.

Joshua Joseph, fixed-income analyst at CSL Stockbrokers Limited, attributed the decline in private borrowing to economic uncertainty and high business costs.

He explained that the increased credit risk has led investors to demand higher premiums, making bank loans a more attractive option despite their high rates.

“As a result of this high cost of borrowing, interest expense is at high levels, and companies that can’t fully pass the cost to end consumers might be declaring huge losses,” Joseph added.

The Nigerian corporate bond market faces significant challenges as companies navigate the high-yield environment and rising borrowing costs.

Kenya’s sovereign dollar bonds experienced a sharp decline following President William Ruto’s decision to abandon a $2.3 billion fiscal plan aimed at balancing the budget and ensuring the nation’s debt sustainability.

This move came in response to widespread and violent anti-government protests that have rocked the country.

The nation’s 2031 debt security plummeted to its lowest price since its issuance in February, making Kenyan bonds one of the poorest performers among emerging and frontier markets since the demonstrations began on June 18.

The protests have resulted in at least 17 deaths and numerous injuries, reflecting the severe public dissatisfaction with the proposed fiscal measures.

Kenya, like many other developing nations, faces an urgent need to implement fiscal reforms to reduce elevated debt levels, control soaring interest costs, and secure funding from the International Monetary Fund (IMF).

However, the proposed measures met significant resistance from a populace already burdened by a cost-of-living crisis exacerbated by post-COVID inflation.

Lawmakers initially compromised on some of the most contentious proposals, such as a 16% tax on bread, but continued public pressure forced the complete abandonment of the plan.

In a televised address, President Ruto conceded to the demands of the protesters. “I concede,” he said. “I will not sign this Finance Bill, 2024. I run a government but I also lead people. And the people have spoken.”

The decision to scrap the fiscal plan leaves Kenya in a precarious financial position. The country’s budget deficit currently stands at 3.3%, with an interest burden consuming one-third of government revenue.

The failure to implement the fiscal reforms raises concerns about Kenya’s ability to stabilize its finances and meet its commitments under the economic plan agreed with the IMF in 2021, which includes reducing the budget deficit, boosting revenue collection, and curbing wasteful spending.

The financial markets reacted swiftly and negatively to the news. Since June 18, Kenya’s securities have handed investors a negative return of 1.3%, marking the most significant losses after Gabon and Egypt in a Bloomberg Index of developing-nation sovereign dollar bonds.

During the same period, the average return for emerging markets was a positive 0.3%.

The protests erupted following President Ruto’s push for new taxes on various sectors, including motor vehicles and mobile-money transfers, to help stabilize the state’s finances.

The rejection of these measures by the public underscores the significant opposition to the ambitious budget and the challenges Kenya faces in making its debt sustainable.

Simon Quijano-Evans, chief economist at Gemcorp Capital Management, highlighted the broader implications for sub-Saharan Africa, a region heavily impacted by global economic shifts such as Russia’s invasion of Ukraine.

“Combined with a very young and dynamic population facing economic challenges on all fronts, this is clearly a huge burden for African society, as seen in the reactions to Kenya’s finance bill,” he said.

Hasnain Malik, a strategist at Tellimer, noted growing concerns about Kenya’s long-term solvency.

“Although the nation’s short-term external liquidity issues had been mostly resolved, its latest fiscal performance has been disappointing,” Malik wrote in a note dated June 21. “This underscores the challenges Kenya faces in making its debt sustainable.”

With the fiscal plan scrapped, President Ruto has few viable options left to address the budget deficit and rising interest costs.

The protests, driven largely by young Kenyans who have previously been apolitical, signal a new level of public engagement and resistance to government policies that fail to address the immediate economic hardships faced by the populace.

Ghana’s eurobond holders are being urged to accept significant reductions in their payments to align with the terms agreed upon by bilateral creditors, according to social justice organizations.

London-based Debt Justice, formerly the Jubilee Debt Campaign, and Accra’s Integrated Social Development Centre (Isodec) have called for bondholders to agree to a 50% cut in debt payments, arguing that this is necessary to match the relief granted by countries such as the UK and China.

The current discussions suggest that the debt relief being considered would result in bondholders receiving 15% more than bilateral creditors.

Debt Justice and Isodec stated that for bondholders to receive terms as favorable as those extended to government creditors, a 50% reduction in their payments is essential.

Ghana is restructuring nearly all of its $44 billion obligations as part of the conditions for a $3 billion International Monetary Fund (IMF) program.

After completing a domestic debt exchange last year, the nation is now close to finalizing an agreement with its bilateral lenders to restructure $5.4 billion and aims to reach a permanent deal with investors on $13 billion of US currency bonds by the end of June.

“Ghana’s negotiations with bondholders are at a crucial stage,” said a joint statement from Debt Justice and Isodec. “For a deal to be struck, bondholders must offer at least as favorable terms as government creditors, and the IMF must confirm that the terms meet their debt relief targets.”

Ghana’s initial agreement with bondholders, reached in April, was rejected by the IMF as it did not demonstrate a sufficient reduction in the country’s debt-to-GDP ratio, which is required to be reduced to 55% by 2028.

The initial proposal would have repaid bondholders 71 cents for every dollar lent, whereas an agreement in principle reached with official creditors in January offered 62 cents for every dollar lent.

“This means that for payments to bondholders to be reduced to 62 cents for every dollar lent—matching payments to governments—they would have to be cut by 50%,” stated the NGOs.

Ghana, utilizing the Group of 20’s Common Framework to reorganize its bilateral loans, recently received a draft memorandum of understanding from its official creditor committee.

The country is currently renegotiating some terms with these creditors to finalize an agreement that aligns with the January in-principle pact.

Signing this memorandum of understanding will enable the IMF to make its third disbursement of $360 million to Ghana, increasing the total amount received under the program to $1.56 billion since it began in May last year.

The G-20 framework has broadened the traditional Paris Club of sovereign creditors to include major lenders such as China, reflecting a more inclusive approach to global debt restructuring.