The Nigerian debt capital markets (“DCM”) experienced a landmark occasion in April 2019, when the Federal Government of Nigeria (“FGN”), via the Debt Management Office (“DMO”), issued its longest-tenored local currency bond – a 30-year bond – for the first time in history.
The issuance of the ₦53.16bn Fixed Rate (14.80 percent) FGN Bond is a clear indication of the commitment of the improving Nigeria’s ability to raise sustainable debt towards promoting economic growth and national development.
Investors demonstrated their ardent appetite for the issue with the results of the April 2019 FGN Bond Auction revealing that a total subscription of ₦80.41bn was received for the ₦20.00bn offered (₦53.16bn allotted) by the DMO for the 30-year bond, representing an over 400 percent subscription rate. This is a glaring indication of investors’ desire for investments at the longer end of the sovereign debt yield curve.
Whilst the decision to issue a long-tenored bond is not an anomaly, this latest issuance comes almost 40 years after the last 25-year bond (previously the longest-tenored local currency FGN Bond) was issued by the FGN in 1980, following previous issuances in 1976 and 1979. With the success of this offering, the DMO has, in addition to managing government’s debt sustainably, reinforced its role in the development of the domestic capital market by facilitating the extension of the sovereign debt yield curve, which represents appropriate funding for housing credit and infrastructure as well as an investment opportunity for both pension fund administrators (“PFAs”) and insurance companies looking to reduce mismatches in their asset durations and liability horizons.
The DMO has listed the bond on the platform of FMDQ OTC Securities Exchange (“FMDQ”) to enhance its visibility and promote secondary market liquidity for the bond. The DMO also listed the bond on the Nigerian Stock Exchange.
The capital market community has lauded this audacious move by the DMO, which positions Nigeria to stand amongst other African markets such as South Africa and Kenya which have previously issued 30-year bonds. Nigeria remains the leading West African nation as stakeholders expect this bond issuance to serve as a case study for other countries within the region, to take the plunge by extending their yield curves.
“The introduction of the bond is a welcome development as it creates further opportunities for growth in the Nigerian financial markets,” said Bola Onadele. Koko, managing director/CEO of FMDQ.
“Furthermore, yield curve extension creates more impetus and opportunities for the introduction of risk management (hedging) products such as bond futures and interest rate derivatives to help fund managers (such as PFAs) and insurance companies that have invested in the bonds to manage the interest rate risk, which is typically higher for longer-tenored debt securities. We are aware that FMDQ, the capital market regulators and other market stakeholders are intensifying concerted efforts to launch these hedging products soon to improve the diversity and global competitiveness of the Nigerian financial markets,” Onadele. Koko said.
“The DMO should indeed be congratulated for its proactivity in reaction to the desires of the buy-side which motivated the DMO’s request to one of the Exchanges to conduct a survey to determine the local and international markets’ appetite for FGN Bonds with tenors over twenty (20) years, and also on their impressive speed to action on the feedback received from the exercise, which indicated the considerable interest by the surveyed investors in longer-tenored sovereign bonds,” he added.
Other stakeholders have indicated that the DMO has cleared the path for other issuers such as subnationals and corporates to access longer-term funding for their projects as the 30-year FGN Bond serves as a benchmark for pricing of non-sovereign debt at the longer end of the yield curve.
Onadele. Koko further added that evidence from the recent issuances of the Viathan Funding PLC ₦10.00bn 10-year bond (the first power bond in the country) and NSP-SPV Powercorp PLC ₦8.50bn 15-year bond, both of which were also listed on FMDQ, indicates that corporates are already taking initiative by accessing the DCM to channel funds towards infrastructure and other economically stimulating projects. It is expected that many non-sovereign issuers would follow suit in the short to medium term.
Considering the encouraging success of the debut 30-year FGN Bond, the DMO is encouraged to continue to blaze the trail for the markets. The introduction of more diverse bouquet of long-tenored securities such as inflation-linked, floating rate and zero-coupon bonds, will promote better management of realised and real yields among others. This will indeed support the development of the Nigerian economy by further deepening the domestic DCM, making Nigeria a more attractive investment destination.
