Basel III capital spurs more banks into OTC bond market

A head of the implementation of third Basel Accord (Basel III), more Nigerian banks are heading to the Over-The-Counter (OTC) debt capital market in search of liquidity for their various fixed income instrument to boost their capitalisation.

Within three months Nigeria’s OTC debt capital market plays host to over N70billion in banks bonds listing.

In April, United Bank for Africa (UBA) plc took the first shot with its N30.50billion bond on the trading platform of FMDQ OTC plc. The listed Bond is Series-1 of UBA plc 7-year 16.45% Fixed Rate Subordinated Unsecured Notes, due in 2021 (the UBA Bond).

“Our bond listing on this platform will avail foreign investors the opportunity to invest in the bond. The bond has boosted our level of capitalisation,” Phillips Oduoza, group managing director, UBA Plc said at the bond listing.

Stanbic IBTC followed suite early this month with it N15.44 billion bond –its 10 year bond due in 2025, which also qualifies as a tier 11 capital for the bank.

“The need for the capital is to enhance our capital base because the bond qualifies us as a tier II capital, it is a ten year bond”, Yinka Sanni, managing director, Stanbic IBTC Bank said.

FCMB Bank listed on the same OTC platform its N26billion bond, which is series 1 of its 100billion debt issuance programme.

Analysts say the listing of these long-term fixed income instruments may signposts more banks positioning for Basel III capital requirement, which is a global, voluntary regulatory framework on bank capital adequacy, stress testing and market liquidity risk.

It was agreed upon by the members of the Basel Committee on Banking Supervision in 2010–2011, and was scheduled to be introduced from 2013 until 2015; however, changes from April1, 2013 extended implementation until March 31, 2018 and again to March 31, 2019.

The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–2008.

Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

This vista of opportunity opened last year for Nigerian corporates, particularly banks, when the Securities and Exchange Commission (SEC) approved the FMDQ Bond Listing and Quotation Rules.

FMDQ is a securities exchange and self-regulatory organisations registered by SEC.

Looking at the value of bonds the banks listed on the OTC platform in relation to cost of listing, BusinessDay investigation revealed that the three banks saved cumulatively, about N53.9million against what it would have cost them to list on the Nigerian Stock Exchange (NSE).

The cost of listing bonds on the Nigerian Stock Exchange (NSE) is 0.15 percent of the value of the programme, while at the FMDQ OTC plc which is an alternative, it costs 0.075 percent of the bond value.

In addition to over 50 percent reduction in bond listing cost, analysts say banks have also been attracted by guaranteed liquidity, as well as transparent price discovery process around their fixed income instrument at the OTC market. 

UBA plc saved about N22.8million for its choice of OTC debt capital market platform; Stanbic IBTC Bank saved about N11.58million; while FCMB would today be saving about N19.5million for routing to list its bond on this same platform.

To hedge against recent potent risk occasioned by bond’s worst enemy (inflation), Nigerian bond investors have been fielding for higher yield to compensate inflation risk.

The situation became more realistic, following recent weak demand from offshore investors since JP Morgan’s ‘threat’ to delist Nigeria from its local currency government bond indices weighs appetite.

“The fixed income OTC market experienced mixed reactions last week, as the short end of the curve witnessed sustained buying activities and consequent decrease in yields, whilst increased selling pressure saw yields rise on the longer maturities. Week-on-week, yields rose by an average of 12 basis points across the curve”, said market analysts at Dunn Loren Merrifield Limited.

“Uncertainties in the FX market might limit foreign participation in the fixed income space this week.  This, along with an expected dearth in liquidity, will lead to sell-offs in the market. Consequently, yields are expected to trend north this week”, according to bond market analysts at United Capital.

Away from corporates, analysts say the Debt Management Office (DMO) has a new challenge in FGN bond issuance calendar for the third-quarter (Q3) of 2015 in the form of apparent investor fatigue.

“After a healthy recovery in demand in both April and May 2015, the total bid in June dipped again to N131billion. Perhaps the delayed FAAC distribution was to blame”, FBN Capital analysts said.

Iheanyi Nwachukwu