Corporate Bonds in Nigeria - Bridging the Infrastructure Financing Gap
The sheer magnitude of the country's infrastructure requirements are far in excess of currently available public financing resources and calls for urgent and diversified mobilization of financial resources. Hence the Federal Government has decided to engage the private sector in its efforts to bridge its infrastructure financing gap by developing the local corporate bonds market as a means of raising the much needed capital to fund its major infrastructure development projects.
What are Corporate Bonds?
Corporate Bonds are debt securities issued by private and public corporations with the intention of raising finance to fund the expansion of the corporation's operations or to finance chronic infrastructure shortages. They are usually secured by all the assets and cash flows of the issuer, which offer investors better asset insurance and risk diversification.
How do Corporate Bonds Work?
Corporate bonds just like government bonds are tradable both on the primary and secondary bond market. Interest rates on the bonds called coupons are payable on a monthly, quarterly or annual basis. To determine the credit worthiness of the corporation issuing the bonds, credit ratings are usually issued by a rating agency. Corporate bonds are generally safer than stocks, given that in the event that the issuer goes bankrupt; bond holders become creditors and are paid before stock holders.
Why Corporate Bonds?
Corporate Bonds offer a range of investment benefits which make them a suitable option for bridging
a. Corporate bonds are stable and offer a fixed and predictable source of long term finance, which is necessary for funding infrastructure projects.
b. They create a dependable income stream as interest payments are on a fixed semi-regular basis which is attractive to potential investors.
c. They usually offer higher yield potential than comparable maturity government bonds. However, this is generally accompanied by higher risks.
d. Corporate bonds are evaluated and assigned a rating based on credit history and ability to repay obligations. Therefore, the higher the rating, the safer the investment which makes them more attractive to foreign investors.
Recent Developments in the Nigeria Corporate Bonds Market
The Nigerian Corporate Bonds market has largely been dormant in the last couple of years, as its progress has been stalled by impediments such as regulatory and cost bottlenecks to issuers; the unavailability of adequate benchmarks for valuation and pricing purposes; and a general lack of interest and demand from potential investors.
In recent years, however, there has been a gradual shift resulting in an increased use of corporate bonds. This has been attributed to a variety of reasons which include - investor's loss of confidence in the equities market following the Nigerian capital markets crash; the local banks’ inability to issue long-term loans, the consistent growth in the sovereign bond market and most significantly, the policy initiatives taken by the Federal Government to develop the corporate bonds market.
The Federal Government in its aim to increase its sources of infrastructure financing has created some incentives to boost activity in the corporate bonds market. Some incentives offered include the exemption of corporate bond investors from withholding tax on their interest income, and a reduction of transaction fees charged to issuers by financial advisers and regulators. The effect of these incentives is that corporate bonds will be at par with Federal Government bonds, as corporate organisations will now be allowed to issue bonds at lower coupon rates and offer tax free returns to investors which will invariably create a higher demand for corporate bonds.
A deep sovereign bond market is critical to the development of a corporate bond market as a well functioning government bonds market provides the corporate sector with a reasonable basis and benchmark for the valuation and pricing of its bonds. To support the growth of the domestic corporate bond market in this regard, the Nigerian Debt Management Office (DMO) has made considerable efforts towards deepening the sovereign bond market, by issuing bonds regularly with a view to creating liquidity in the bonds market. As at May 2010, the DMO had raised N80 Billion naira from the sale of 20-year, 5 year and 3 year sovereign bonds. The DMO also recently indicated its desire to issue a $500 million sovereign bond as it is hoped that this will establish a sovereign benchmark in the international capital market.
So far, government efforts to develop the corporate bonds market particularly with the use of incentives has yielded fine results. Market analysts report that the sector has experienced remarkable growth following government policy initiatives as about N200 billion naira worth of corporate bonds were issued in the first quarter of 2010, with high expectations of further growth given the indication of some major corporations and local banks to float bonds totaling over a trillion naira.
The importance of a strong and viable domestic corporate bonds market as an alternative source of finance in emerging economies has been affirmed by the success it enjoyed in countries such as
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