Corporate debt issuance in Nigeria is expected to remain robust throughout 2021 even as interest rates begin to rise from last year’s record low levels, according to a new research by GCR credit ratings.
Nigerian corporates issued a record N1.02 trillion (USD 2.69 billion) of local currency debt instruments in 2020, the highest since at least 2014, as a record low interest rate environment spurred appetite for borrowing.
Going forward, favorable demand and supply-side dynamics are expected to continue to be supportive of local currency debt issuance in Nigeria, according to Akintunde Majekodunmi, CEO of GCR Ratings, who expects debt issuance in 2021 to remain at the N1 trillion level attained last year, despite rising interest rates.
“In recent months, interest rates, as represented by Nigerian treasury bill yields, have increased significantly, but currently remain below year-end 2019 levels,” Majekodunmi, a former Vice President at Moody’s said.
“Notwithstanding, since the beginning of 2021, Commercial Paper (CP) rates continue to remain lower than the prime lending rates at banks,” he said.
According to FMDQ Securities Exchange, current valuation yields for CPs range between 4.1 percent to 10.4 percent versus the average prime lending rate of 11.13 percent, as of March 2021. For some banks, the prime lending rate was as high as 27 percent. This places CPs as cheaper alternatives to bank loans.
“Overall, GCR believes Nigerian corporates will continue to look to capital markets as an alternative and/or complementary source of funding to bank borrowing,” Majekodunmi added.
Companies in the financial services and industrial sectors, which were the main issuers of debt accounting for 42 percent and 26 percent of total issuance, respectively in 2020, are expected to continue being main issuers over the next 12 to 18 months, according to GCR.
Issuing debt instruments is increasingly becoming a viable funding source for Nigerian entities.
Companies are diversifying their funding base through the issuance of CP and/or bonds.
The year 2020 saw a record number of CP issuances, 66, up from 60 issued in 2019. As much as N762 Billion (USD 2.01 Billion) was raised in those 66 issuances, which came to 75 percent of total debt raised in the period.
There was also a record amount of corporate bond issuance at N259 Billion (USD 0.68 Billion), 25 percent of the total.
From a supply-side perspective, the key driver of the robust growth in corporate debt issuance in Nigeria in 2020 was low borrowing rates.
Yields on short and long-term debt instruments dropped to record lows last year due to excess liquidity in the market after the Central Bank of Nigeria (CBN) imposed restrictions on its Open Market Operations (OMOs) and eased monetary policy to aid economic recovery; cutting its Monetary Policy Rate to 11.5 percent from 13.5 percent over 2020.
Issuance of corporate debt spiked as firms took advantage of the low rates to refinance expensive bilateral loans with banks and/or raise additional debt.
On account of the challenging operating environment, commercial banks in Nigeria have been proactively de-risking their balance sheets by reducing the amount of credit extended to the private sector.
Banking system loan growth was 17.6% over 2020, however, once the impact of the depreciation of the naira on foreign currency denominated loans is accounted for, 2020 banking system loan growth was fairly flat.
Additionally, given uncertain and challenging operating conditions as a result of the COVID- 19 pandemic, several Nigerian companies have sought funding to bolster their liquidity profiles and/or working capital.
Further, in order to take advantage of low valuations and mitigate uncertainties in their supply chain, some companies are using this opportunity to raise funds in order to invest in growth strategies and/or vertically integrate.
In recent months, Emzor Pharmaceutical Industries Limited issued N13.73 Billion (USD 36 Million) of bonds in support of its expansion plans and backward integration initiative into active pharmaceutical ingredients.
MTN Nigeria Communications Plc raised N110 Billion (USD 290 Million) of bonds to optimise its existing funding mix and finance network expansion.
Lastly, Dangote Cement Plc has raised bonds to fund expansion projects, refinance short term debts and support its working capital needs.
From a demand-side perspective, institutional investors, such as pension funds and asset/fund managers remain willing and able subscribers of issued debt.
Primary market bond transactions over the last 18 months have been mostly oversubscribed.
According to the National Pension Commission (Pencom), as of February-end 2021, Nigeria’s pension funds had N12.2 trillion (USD 32 Billion) of Assets Under Management (AUM), this is an increase of 17% from February 2020’s.
Corporate debt issuance may even eclipse last year’s record, according to Wale Okunrinboye, head of investment research at pension fund manager, Sigma Ltd.
“Issuance will remain strong as corporates look to boost liquidity to make up for shortfalls that may arise due to the weak economy; appetite from institutional investors like pension funds is also expected to remain as strong as ever,” Okunrinboye said.