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Capital Market

Nigeria’s Debt Capital Markets: Robust Corporate Debt Issuance Will be Sustained Over 2023 and Beyond



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Corporate Debt Capital Issuance Recovered Over 2022

Following the sharp decline in corporate debt capital issuance over 2021 of 38%, a record NGN1.5 Trillion (USD 3.2 Billion) of debt was issued in Nigeria in 2022, representing a 133% increase year-on-year. Using FMDQ data, there is currently approximately NGN 2.1 Trillion (USD 4.6 Billion) of publicly issued nonfederal local currency debt capital outstanding; the majority being corporate bonds at 71% of total (NGN 1.5 Trillion, USD 3.3 Billion).

As of year-end 2022, GCR rated approximately 80% of outstanding publicly issued non-federal local currency debt in Nigeria. Debt capital issuance, specifically CP issuance, in Nigeria decreased significantly over 2021. As shown in figure 2, below, Nigerian corporates issued just NGN379 Billion (USD 824 Million) of CP over 2021 compared to a record NGN762 Billion (USD 1.66 Billion) of CP in 2020. The reduction in CP issuance reflected rising yields, and thus rising cost of funding, over 2021 from a very low base.

Treasury bill yields continued to rise in 2022; increasing from 2.48% (91 day), 3.3% (182 Day) and 5.4% (364 Day) in January 2022 to a peak of 6.5% (91 day), 8.05% (182 Day) and 14.5% (364 Day) in October 2022. However, unlike 2021, the rising interest rate environment in 2022 did not curtail debt capital issuance.

2022 saw a deepening of challenges for Nigerian corporates on account of weak economic growth, a high headline inflation rate, spiralling fuel costs and supply-chain disruptions. As a result of this challenging environment, Nigerian corporates increasingly sought short-term funds through CP issuances in order to meet their working capital requirements i.e., to fund their day-to-day operations.

Working capital funding is common for businesses facing near-to-medium term uncertainty and/or businesses with inconsistent cash flow. 2022 saw 140 CP transactions totalling NGN762 Billion (USD 1.66 Billion) versus 61 transactions totalling NGN379 Billion (USD 824 Million) in 2021.

Bond issuance also grew significantly over 2022 at 189%. Nigerian corporates are choosing to issue local currency debt capital over borrowing in foreign currency. The challenging foreign exchange environment in Nigeria manifests itself in foreign currency shortages within the financial system and weakened relationships between Nigerian banks and foreign correspondent banks which ultimately led to unfavourable terms for Nigerian corporates looking to borrow in foreign currency.

We do not expect the unfavourable terms of foreign currency borrowing to change in the near-term. Growth in bond issuance was predominantly down to big ticket transactions to fund large capital expenditure projects, or acquisitions, such as:

• Dangote Industries Limited’s (AA+(NG), Stable) NGN300 Billion (USD 652 Million) bond to fund the construction of the Dangote refinery,
• Dangote Cement Plc’s (AA+(NG), Stable) NGN116 Billion (USD 252 Million) bond to fund expansion projects within the Nigerian market,
• MTN Nigeria Communications Plc’s (AAA(NG), Stable) NGN115 Billion (USD 250 Million) bond to fund the expansion of its 5G network,
• Geregu Power Plc’s (A(NG), Stable) NGN40.1 Billion (USD 87 Million) bond to fund the acquisition of a power plant,
• Presco Plc’s (A-(NG), Stable) NGN34.5 Billion (USD 75 Million) bond to fund the acquisition of a palm oil business and
• LFZC Funding SPV Plc’s (Lagos Free Zone Company) (AAA(NG), Stable) NGN25 Billion (USD 54 Million) Guaranteed Bond to fund the construction of various assets within the free zone.

The aforementioned Presco transaction is the first local bond from an entity operating in Nigeria’s palm oil industry.

Recent Crash in Money Market Yields Will Drive Corporate Debt Issuance in the Near-term

As shown in figure 5, over 2022, the CBN increased its Monetary Policy Rate (MPR) by 5 percentage points in order to curb rampant inflation. The CBN’s hawkish stance ultimately led to rising yields in money markets with 364 day rates rising from a 2022 low of 4.35% in February to a peak of 14.5% in October.

However, in recent months we have witnessed a dislocation in money market and MPR rates. Despite a 150 basis point increase in MPR this year, money market yields fell significantly; approaching levels close to fourth quarter 2020.

The dislocation is on account of the significant influx of liquidity into the financial system in recent months. Nigeria witnessed the highest Federation Account Allocation Committee (FAAC) pay-out of 2022 in December of NGN990 Billion (USD 2.2 Billion). Secondly, the CBN’s currency redesign meant that a significant quantum of cash has been redeposited at banks since its commencement, in fact, on 29 January 2023, the CBN reported that NGN1.9 Trillion (USD 4.1 Billion) of cash was redeposited in the prior two months.

We expect the aforementioned factors to moderate over the medium term and for money market yields, and thus corporate yields, to normalise as FAAC placements are expended and naira notes redistributed. Notwithstanding, according to FMDQ Securities Exchange, the average valuation yields for listed bonds as of 28 February 2023 was 12.5% versus the average prime lending rate of banks of 13.67%, as of February 2023 (the prime lending rate at some Nigerian banks was as high as 28.5%). GCR believes Nigerian corporates will continue to look to debt capital markets as a cheaper source of funding to bank borrowing.

Robust Corporate Debt Issuance to be Sustained Over 2023 and Beyond

Over the next 12 to 18 months, we expect robust debt issuance to be sustained as the political direction of new leadership becomes more certain; allowing Nigerian corporates to make better informed funding decisions. In the nearer term, issuance will be supported by the aforementioned fall in yields. At present, we are witnessing a strong pipeline of new transactions over the next 12 months; partly in new asset classes such asset back securities.

Additionally, the advent of Basel III regulations will mean that Nigerian banks will have an increased need to issue Additional Tier 1 and Tier 2 debt capital. Furthermore, Basel III’s liquidity coverage requirements mean that banks will have a greater need for High Quality Liquid Assets (HQLA) in the form of corporate bonds.

Overall, Basel III will be supportive of deepening Nigeria’s capital markets.

Lastly, issuing debt instruments continues to be an increasingly viable funding source for Nigerian entities. Companies will continue to diversify their funding base through the issuance of CP and/or bonds for the foreseeable future.

Nigeria’s Institutional Investors will Continue to Invest Heavily in Local Currency Corporate Debt

Domestic institutional investors, such as pension funds administrators and asset/fund managers remain willing and able subscribers of Nigeria’s corporate debt capital. Corporate debt instruments continue to offer institutional investors reasonable return premiums above sovereign benchmarks.

Primary market bond transactions in recent years have been mostly oversubscribed. According to the National Pension Commission (Pencom), as of December-end 2022, Nigeria’s pension funds had NGN15 Trillion (USD 33 Billion) of Assets Under Management (AUM), this is an increase of 12% from December-end 2021’s total of NGN13.4 Trillion (USD 29 Billion).

In particular, corporate bonds under management grew from NGN920 Billion (USD 2 Billion) to NGN1.4 Trillion (USD 3 Billion), an increase of 52%. According to the Securities and Exchange Commission (SEC), as of March 2023, the net asset value (NAV) of Nigerian mutual funds had risen to NGN1.574 trillion (USD 3.4 Billion), representing an increase of 11% from March 2022 levels.

GCR estimates Nigeria’s total pension and mutual fund assets under management as a percentage of Nigerian GDP to be less than 10% versus 67% for OECD countries as of year-end 2021. Given the small size of both pension and mutual fund AUM as a percentage of GDP, there is significant capacity for AUM growth. GCR expects institutional investors to meet the funding needs of local debt issuers for the foreseeable future.

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Capital Market

Stanbic IBTC Holdings to Raise N550bn Through Debt Issuance, Rights Issue



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Stanbic IBTC Holdings, one of Nigeria’s leading financial institutions, is set to raise a total of N550 billion through a combination of debt issuance and a rights issue.

This ambitious move comes amidst the backdrop of regulatory changes and the need for financial institutions to bolster their capital bases to meet new requirements set by the Central Bank of Nigeria (CBN).

The announcement was made in a notice of the company’s annual general meeting filed with the Nigerian Exchange Limited.

According to the disclosure, Stanbic IBTC Holdings plans to establish a debt issuance program with a capacity of up to N400 billion.

This program will enable the company to issue various forms of debt securities, including senior unsecured or secured, subordinated, convertible, preferred, equity-linked, or other forms of debt obligations.

Also, the board of Stanbic IBTC Holdings is seeking shareholder approval to raise additional equity capital of up to N150 billion through a rights issue or offer for subscription.

Shareholders will also vote on increasing the company’s issued and paid-up share capital to accommodate the proposed capital raise.

Stanbic IBTC Holdings has been a key player in Nigeria’s financial landscape, with a strong track record of performance and a diverse range of financial services.

The proposed capital raise is expected to provide the company with the necessary resources to pursue growth opportunities, enhance its market position, and continue delivering value to shareholders and stakeholders alike.

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Capital Market

Nigerian Breweries to Raise N600 Billion to Tackle Foreign Exchange Debt



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Nigerian Breweries Plc, the largest brewery in Nigeria, has announced plans to N600 billion through a rights issue, with the primary objective of clearing its N500 billion foreign exchange debt burden.

This initiative was unveiled by Uaboi Agbebaku, the company’s secretary and legal director, during a pre-annual general meeting press conference held in Lagos.

Agbebaku stated that Nigerian Breweries is committed to implementing a comprehensive company-wide reorganization strategy to ensure a resilient and sustainable future for all stakeholders.

“The additional capital raised via rights issue will be utilized to settle all overdue foreign exchange debts and payables, effectively eliminating foreign exchange exposure,” Agbebaku explained.

He further highlighted the importance of strengthening the company’s balance sheet and liquidity position to restore profitability in the shortest possible time frame.

Hans Essaadi, the managing director and CEO of Nigerian Breweries, echoed Agbebaku’s sentiments, acknowledging the challenging operating environment characterized by factors such as double-digit inflation rates, currency devaluation, and foreign exchange challenges.

Essaadi emphasized the urgency of addressing these issues to mitigate their adverse impact on the company’s financial performance.

To achieve its objectives, Nigerian Breweries intends to leverage the support of its majority shareholder, Heineken Plc, which has committed to contributing over 50 percent of the N600 billion fundraising target.

This partnership underscores the strategic importance of the rights issue in revitalizing Nigerian Breweries’ financial health and positioning it for sustainable growth.

As part of its broader business restructuring efforts, Nigerian Breweries had previously announced plans to temporarily suspend operations at two of its nine breweries.

Sade Morgan, the director of corporate affairs at Nigerian Breweries, explained that the company is committed to executing its 2024 business recovery plan, which comprises cost management, operational optimization, and portfolio innovation.

“Our strategy for success in 2024 revolves around strong cost management, operational efficiency, and the introduction of exciting innovations to delight our customers,” Morgan stated.

“We remain dedicated to our employees, communities, and stakeholders as we navigate through these challenging times.”

With the proposed rights issue, Nigerian Breweries aims to not only alleviate its foreign exchange debt burden but also to fortify its financial resilience and drive sustainable growth in the dynamic Nigerian market.

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Capital Market

Royal Exchange Plc Rights Issue Falls Short, Closes at 75.83%”



Royal Exchange Plc

Royal Exchange Plc, a leading player in life assurance, health insurance, and credit financing, recently concluded its rights issue with a subscription rate of 75.83%, indicating a shortfall in investor uptake.

The rights issue aimed at raising capital through the issuance of additional ordinary shares saw only a portion of the offered shares subscribed by existing shareholders.

According to the weekly report of the Nigerian Exchange Limited, an additional 3,121,328,866 ordinary shares of 50 kobo each were listed on the market, resulting from the completion of Royal Exchange’s rights issue.

This falls short of the total intended issuance of 4,116,296,059 ordinary shares at a price of N0.50 per share.

Despite the lower-than-expected subscription rate, Royal Exchange remains optimistic about its future prospects.

The company’s unaudited 2023 report revealed significant growth in earned income, soaring by 253% to N882.32 million compared to the previous year.

This boost in earnings was attributed to increases in net interest income and profits from investments in associates, totaling N591.55 million.

Also, Royal Exchange reported a profit of N46.09 million for the year 2023, a stark turnaround from the loss of N150.47 million recorded in 2022.

The company’s restructuring efforts, with a focus on asset management, have contributed to its improved financial performance.

Despite the shortfall in its rights issue, Royal Exchange Plc remains committed to its growth trajectory, leveraging its strengthened financial position to capitalize on emerging opportunities in the insurance and financial services sectors.

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