As revenues in government and corporate entities dwindle, economic agents are compelled to think of alternative sources of financing their activities. The efforts are imperative as banks are reluctant to lend. The equities market, another traditional source of financing, currently offers fewer opportunities to fund users in view of the fragile market recovery and volatility.
A couple of companies that have accessed the equities market through offer for subscription and rights have failed to realize their target due to massive under subscription.
Equally of concern is the need to access funds at cheap rates, and this must have informed Federal Government inclination towards cheap funding of developments. Olusegun Aganga, Finance Minister, had recently disclosed that government will go for cheap fund to finance real sector development. This became necessary given the rising cost of doing business and production. As part of the strategies of realizing the objective of accessing cheap fund, the government plans to enunciate policies that will moderate interest rates. This is commendable as it will reduce cost of fund largely in an environment plagued by double digit inflation at 11 percent.
However, we note that with the difficulties of raising funds in the money and equities market, the bond market offers great opportunities for cheap funds. The fixed income securities serves as a good window for corporate bodies, currently starved of long term funds, to issue corporate bonds. For governments, the bond market also serves as a preferred window. With increasing pressure on existing revenue and federal allocation, using the bond market as a source of capital has become very imperative. This is because federal, state and local governments can access the market for fund to execute their long term development projects. Whether for corporate, sovereign or municipal bond, issuers are obliged to pay interest at an agreed time. For federal, state and municipal, interest is paid twice a year for these debt instruments, unlike bank loans that attract interest monthly. Thus, such long term money offers issuers breather to meet payment obligation within the tenor.
Since the inception of Debt Management Office (DMO), the bond market has been effectively used by the Federal Government to finance its deficits unlike in the past when it used ways and means for the same purpose. The reforms introduced in the bond market have resulted in huge interest in bonds with the results that all the instruments issued by the government have been massively oversubscribed by investors. The recent tax waver by the Federal Government and reduction in the fees charged by issuers have also served as incentives to investors. The structuring of bonds into longer term 20 year instruments has also created a yield curve that now serves as benchmark for corporate bodies to price their bonds. These incentives may have informed the increasing interest of state governments and companies to access the market.
Business Day however believes that a lot more opportunities can be harvested in the bond market by public and private fund users if a number of steps are taken. To secure the patronage of investors, the price of bonds should be market driven. At present, fixed income instruments are over priced, meaning yield below inflation and negative real return on investment. Currently, there are fears of burst in the market given increased interest. And this must be addressed. The instruments should also be structured in a manner that the coupon rates will compete with rates in other frontier markets.
No doubt the appointment of primary market dealers has aided success in the primary end of the bond market but deliberate efforts should be made to develop the secondary market so that retail investors can participate in bond transactions.
For state and local governments, the provision of Irrevocable Standing Payment Order (ISPO) is imperative as security to investors’ money. With ISPO, fund owners’ money is deducted from federal allocation at source. Furthermore, more incentives should be given to investors in form of reduction in issuing fees and tax breaks. We also advocate that the issued bonds should be project-tied and charge regulators, especially the Securities and Exchange Commission (SEC) to upgrade its monitoring and regulatory capacity. This is to ensure that the bond proceeds are deployed for the purpose it was issued and that the projects are self financing.
Our position is that proactive steps should be taken to enhance and sustain investors’ confidence. These should serve as driving force to harness the huge opportunities in the bond market and the time to do that is now.