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CBN’s liquidity deluge spurs demand for corporate bonds

Dangote Cement

The Central Bank of Nigeria’s (CBN) OMO policy which has led to a deluge of financial system liquidity, is spurring demand for corporate bonds, encouraging firm’s to tap the Nigeria debt market for cheaper working capital and expansion.

Last week, there were three debut bond auctions by restaurant chain operator Eat & Go, and two commercial papers by Dangote Cement and Flour Mills, which shows some companies have confidence in the Nigerian market despite a tough macroeconomic environment.

Eat ‘N’ Go Limited, a leading restaurant group behind the Domino’s Pizza, Cold Stone Creamery, and Pinkberry brands in Nigeria, launched a double-tranche offering (5-year and 7-year) to raise N10 billion under a N15 billion issuance programme.

The offer is expected to close on Tuesday 10 December 2019 as the issuer is looking to price the 5-year bond at an indicative coupon of 13.50 percent –13.75 percent, and the 7-year bond at a range of 14 percent –14.25 percent.

Dangote Cement, the largest producer of the building material and the most capitalised firm on the bourse, plans to raise N45 billion under a N150 billion commercial paper programme for a tenor of 178 and 269 days.

The series 13 paper is priced at an implied yield of 7.75 percent which offers a spread of 68 bps to the corresponding NTB, while the series 14 is priced at 8.50 percent, offering 115 bps spread to the federal government.

Flour Mills Nigeria Plc, the largest miller by market capitalization, plans to issue N5 billion commercial paper at 8.87 percent and 9.50 percent under a N100 billion programme as it seeks to reduce debt and bolster earnings

“Because of the new policy, people will have to find where to put the money. Treasury bills are usually oversubscribed. The demand for instrument has outstripped supply thereby creating an asset bubble that has seen bond prices go up while yields fall,” said Wale Okunrinboye, analyst at Sigma Pension.

Analysts say these firms are planning to take advantage of the lower fixed income yield interest rate now in single digits, thanks to a central bank directive eliminating domestic individuals and non-bank corporates from the Open Market Operations (OMO) bills market, which has created ample financial system liquidity, and forced investors to seek other investable assets.

Analysts believe yields will continue to moderate, and over time the borrowing cost to government will be lower.

OMOs, which typically have maturities of less than a year, were originally used by the central banks to control liquidity and mainly bought by lenders.

The average yield for naira government bonds stood at 11.92 percent as at December, according to data from FMDQ Securities.

Kayode Tinuoye, Head of Portfolio Management at United Capital Limited said he expects more issuance from bellwether companies like Guinness, Access Bank, and Stanbic IBTC.

The aim of the OMO restriction is to force banks to extend credit to the manufacturing, real estate, and Agriculture sector.

“We expect investors to bid aggressively for the offer given Dangcem’s strong credit rating and the ample financial system liquidity. More interest could be seen on the longer-dated series on account of its more attractive spread,” said analysts at Chapel Hill Denham Limited.

 

BALA AUGIE