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Nigeria’s low-interest rate creates opportunities for these businesses

… as 4 corporates raise N34.5bn in January

Among the challenges in Nigeria’s troubled economy lie some opportunities. Access to cheap capital amid low-interest-rate environment is one of the few gains available to large corporates in this pandemic era.

With a record-low interest rate in Nigeria, companies have the opportunity to raise cheap capital while those with existing bonds that were raised when rates were about 15-18 percent can restructure their debt.

Commercial papers (CP) represent short-term debt instruments issued by large organisations to meet their financial obligations as well as cover short-term receivables within a short period, usually between 15-270 days. Generally, CP carries lower interest repayment rates than bonds due to the shorter maturities of CP.

Yields on both T-bills and bonds instruments have hit a bottom record from a double interest rate enjoyed some few years ago.

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. But the recent OMO policy by the Central Bank of Nigeria (CBN), which prevents domestic investors from participating in the auction, is the key driver of the low interest enjoyed today.

Effect from October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participation in its Open Market Operations (OMO) at both the primary and secondary markets. The CBN’s policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.

“Now is the time for companies to restructure their debt and access lower finance cost to grow their bottom-line,” Yinka Ademuwagun, research analyst at United Capital, said.

Information gathered from FMDQ shows that four large corporates in Nigeria as at the end of January 2021 raised a combined N34.5 billion in bonds and CPs.

Nigerian Mortgage Refinance Company plc (NMRC) recently issued its Series 3 N10 billion Fixed Rate Bond under its N440.00 billion Bond Issuance Programme.

The listing joins a host of other corporate securities issued on the FMDQ Exchange Platform like Total Nigeria plc, Valency Agro Nigeria Limited, Mixta Real Estate plc, and Flour Mills of Nigeria plc, which raised N2.55 billion, N2 billion, and N20 billion, respectively.

While the low-interest rate environment in Nigeria’s debt market has been a boon for large corporates who are raising capital at cheaper rates compared to bank loans, micro and small businesses, which form the bulk of firms in the country, are left out.

Lack of proper documentation and inability to meet listing requirements are some of the reasons Nigerian small businesses are unable to tap the low-interest rate opportunity.

Checks by BusinessDay, however, show that some of the small businesses indirectly benefit from the big companies who are accessing cheap funds.

According to an economic outlook report: ‘Implications for Businesses in Nigeria for 2021’ by Doyin Salami, CEO, KAINOS Edge Consulting, the low-interest rate will drive the performance of the following sectors:

Agriculture

In a bid to mitigate the impact of the novel coronavirus on Nigeria’s agriculture sector, the central bank came up with a Mass Agricultural Programme and was conceived to span the entire agricultural value chain, from ‘farm to table’ with an estimated cost of N634 billion.

The programme is expected to bring between 20,000 and 100,000 hectares of new farmland under cultivation in every state of the Federation through a multi-layered approach. Smallholder farmers will receive support directly or through out-grower schemes. This will be by way of services and inputs.

According to Salami, the agric sector will benefit because it will be “insulated from market interest rates by CBN’s interventions.”

Meanwhile, the central bank also unveiled N50 billion credit facility and cut down the interest rate on intervention funds from 9 to 5 percent among other measures to support micro, small and medium-sized businesses (MSMEs), and particularly, agribusinesses.

Oil & Gas

Known to have high credit exposure, the oil and gas industry is expected to benefit largely from the low interest in Nigeria. Banking sector loan exposure to the oil and gas sector at over 20, means over that percentage of the industry’s total loan portfolio went to the oil and gas industry.

Distribution

With the outbreak of COVID-19, the Nigerian distribution and logistics industry experienced a boom amid lockdown. The cheap funds raised by companies like Flour Mills, are a plus for such distribution companies as it translate to more business activities for them, an opportunity for small businesses that cannot go to the market to access cheap capital.

“Lower interest rates are beneficial to distributors, the route to market players of major manufacturers and non-manufacturing corporates,” Salami said.

Manufacturing

Salami believes lower interest rates are beneficial to manufacturers on the demand side. Due to the low-interest-rate environment, companies in the manufacturing sectors, especially the fast-moving consumer goods industry that were cash strapped due to the impact of the COVID-19 pandemic, now have the opportunity to access growth capital. FMN is one such that has already tapped from the low-interest rate market.

ICT

Players in the ICT industry, one of the industries that were less affected by the impact of COVID-19, have opportunity to access cheap funds to boost performance. “Borrowers to benefit from lower rates; Treasury income adversely affected by lower rates,” Salami cited.

Real Estate

When yields from the less risky government short-term instruments like treasury bills, investments in the real estate instruments were less attractive amid low return. But with the low yield on government instruments, the return from investment in the property sector is expected to be the same, if not higher than securities yields.

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