How low-interest rates hold cheap finance cost, debt restructuring opportunity for companies

Nigerian companies with plans to either raise cheap capital or readjust cost of finance may have it on a silver platter as the low interest rate environment presents such opportunities.

While interest rates in Nigeria have always been high due to the monetary system in vogue since 2009, which sought to use FGN bonds/T-bills and OMO bills as a means of attracting US dollars into the country to stabilise the naira, the recent OMO policy by the Central Bank (CBN) which prevents domestic investors from participating in the auction is the key driver of the low interest enjoyed today.

Yields on both T-bills and bonds instruments have hit a bottom record from a double interest rate enjoyed some four years ago, and according to industry analysts, the low yield environment is an opportunity ready to be tapped.

“It presents an opportunity for companies to raise cheap capital, and those that have existing bonds that were raised some two or three years ago when rates were about 15-18 percent can call the bond,” Yinka Ademuwagun, research analyst at United Capital, said.

Now is the time for companies to restructure their debt and lower finance cost to grow their bottom-line, he said.
United Bank for Africa (UBA) plc is one of the few Nigerian companies that have already taken a position to restructure its financing cost as it plans to redeem its bonds issued six years ago.

Rather than continue paying interest of 16.45 percent on its seven-year bonds, UBA plc said it would redeem its outstanding N30.5 billion bonds issued in December 2014 and due to mature December 2021 on June 30, 2020.
“This is positive for the bank due to the low yield environment,” said Ayodeji Ebo, managing director, Afrinvest Securities Ltd.

He interpreted the decision by the lender to mean “I have enough cash and I want to tap from the low-interest environment”.
With the decision by UBA to make an early call on its bonds, the commercial bank would be saving about 6 percent as the yield on a seven-year bond is currently at about 10 percent.

Ayorinde Akinloye, a research analyst at CSL Stockbrokers, said Nigeria’s low yield environment also gives room for companies to raise cheap capital.
“Raising debt capital becomes cheaper and provides an opportunity to invest significantly in capital expenditure,” Akinloye said.
From a valuation perspective, Akinloye explained that it implies a possible reduction in discount rates which means increased company valuation.

“This is particularly useful for companies intending to raise equity capital,” he said.
MTN Nigeria plc said on May 28 that it has commenced its Commercial Paper (CP) Issuance (Series 1 & 2 of N50 billion each) under its N100 billion CP issuance programme.

While the Telco plans to use the proceeds to its working capital and general corporate purposes in Nigeria, the telephone service provider said in a statement that the issuance has a tenor of 180 days (CP 1) and 270 days (CP 2) with a discount rate of 4.6890 percent – 4.8797 percent (CP1) and 5.8500 percent – 6.000 percent (CP2).

“MTN is raising their commercial paper at about 4 percent, it is a low cost of financing, they tend to get cheap financing,” Ademuwagun said, adding that if the Telco was to go to banks to borrow that kind of money, it would have got at least 11 percent. “That is because MTN is big. If it were smaller companies they would probably be getting it at around 15 percent.”
According to industry analysts, Nigeria will likely see an increase in commercial paper issuance in 2020, particularly because of the slow economic growth resulting from the impact of the coronavirus pandemic.
“This particularly becomes useful in a period of economic turmoil where CAPEX spending is expected to be depressed. This informs why the MPC cut the MPR in its last meeting,” Akinloye said.

The CBN slashed the Monetary Policy Rate (MPR) by 100 basis points to 12.5 percent to spur lending to the economy which faces imminent recession on twin pressures of COVID-19 pandemic and low oil prices.
But the apex bank retained the Cash Reserve Ratio (CRR) at 27.5 percent and also left the Liquidity Ratio (LR) at 30 percent, Godwin Emefiele, CBN governor, said during a virtual briefing after the last MPC meeting in May.

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