Investors flock to govt debt as rates crowd out firms

Nigerian companies faced funding squeeze in 2024 as investors flocked to high-yielding government debt instruments.

According to data from FMDQ, the total number of company issuances in 2024 decreased to 133, from 140 issued by various companies in the previous year.

Similarly, the amount issued dipped by 12 percent to N790.4 billion in 2024 from N900 billion seen in the previous year.

To fight stubbornly high inflation, the Central Bank of Nigeria (CBN) hiked benchmark interest rates eight times and by 875 basis points to 27.5 percent in November 2024, from 18.75 percent at the beginning of the year.

The interest rates rise led to the crowding out of the private sector, as it became more expensive for corporates to borrow funds from the capital market.

With the continuous rate hikes, yields on the one-year treasury bills (T-bills) started to increase and peaked twice. Once in the July 2024 auction, the true yield stood at 28.36 percent and eventually moved to 30.7 percent in the November 20 auction.

Nigeria’s one-year T-bill auction witnessed the largest investor interest this year at the December 5 auction, attracting N2.53 trillion in bids, nearly five times the amount offered on system liquidity.

The high interest rate meant that corporations had to offer a more competitive rate on their instruments to attract investors.

The average discount rates on commercial papers increased to 27 percent in 2024 from 16.4 percent in 2023. Some commercial papers were issued at rates as high as 30 percent. An example of such is Hillcrest Agro-Allied Industries, which raised its commercial paper at an effective yield of 35 percent.

“This means apart from the fact that the overhead cost has increased due to the recent policies of the government, companies now have to battle with increased borrowing costs. Overall, this is not good news for companies,” said Opeyemi Babalola, portfolio manager, Comercio Partners.

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Big companies like MTN Nigeria Communications Plc, Flour Mills of Nigeria Plc, GZ Industries Limited, Dufil Prima Foods Plc, C&I Leasing Plc, Saroafrica Funding SPV Plc tapped into the commercial papers market.

The largest issuer in terms of quantity was Daraju Industries Limited with a total of 12 issuances valued at N18.2 billion, followed by Skymark Partners Limited with nine issuances valued at N10.7 billion.

However, Dangote Sugar Refinery Plc was the largest issuer by amount, with a total of N141.8 billion in 2024 from five commercial paper issuance.

It is followed by Dangote Cement Plc with N119.4 billion from four issues in 2024.

Earlier in 2024, many analysts had projected the crowding out of private firms due to the high-yield situation.

Joshua Joseph, a fixed-income analyst at CSL Securities, had said that the hawkish stance by the CBN was normal to curb the inflationary pressure and would ensure there was a balance.

He however said that the borrowing cost would increase because investors were bent to seek high returns due to the high interest rates environment.

“The impact will be very high-yield bonds for corporates that don’t have very good credit rating, but companies with very good credit ratings will have their rates a bit above what the government bond is doing, though their borrowing cost will be high,” he said.

According to data from FMDQ and Africinvest 2025 outlook report, the number of corporate bond issuances dropped to one from four issued last year.

Nigerian banks increased their lending rates following the record hike by the CBN. This development saw businesses and individuals with existing loan facilities with the banks pay more to service those loans.

Zenith Bank, the country’s largest bank by market capitalisation, raised its interest rate by 500 basis points to 30 percent from 25 percent.

The review took effect from March 12, 2024. Keystone Bank’s lending rate ranged between 30.5 percent and 36 percent, while First Bank’s lending rate ranged between 26 and 36 percent.