The future of Nigeria’s Debt Capital Market (2)

A Challenging, But Potentially Fruitful Transition. There are still a number of important challenges across the value chain for Nigeria’s DCM, however the opportunities to take the market to the next level are numerous and must not be ignored. FMDQ, as the foremost DCM securities exchange in Nigeria, has identified and is working towards providing actionable solutions to some of the challenges as shown below:

Commencement of Capital Market Track Record by Public Companies through Commercial Papers (CPs) and Short-Term Bonds (STBs)

Companies must build investor confidence in their papers through stellar issuance performance track records. Performances on short-term papers add–up to give credence to the Company’s ability to perform on longer-dated papers when issued. In 2014, FMDQ identified the need for a robust structure around the issuance and quotation of CPs.

Consequently, FMDQ developed a process to revitalise the Nigerian money market and further enhance transparency at the short end of the corporate yield curve. This transparency drive is also characterised by continuous disclosure of relevant information on instruments quoted on the exchange.

This information includes: issuer, issuance type, outstanding value and issuer history. The securities exchange promotes credibility for quoted CPs, through a highly efficient registration process which supports price reasonability and audit trails. In support of this process, FMDQ released its Commercial Paper Quotation Rules (CPQR) to govern the quotation of CPs on its platform and is currently working on releasing the Rules for registration and quotation of STBs

Private Companies taking advantage of the Debt Capital Markets

Encouraging private companies to tap into DCM will require efforts from the financial advisers and the Corporates themselves. Areas of major consideration include better transparency and governance on the part of the Corporates and improved liquidity driven by FMDQ and other key market participants

Growing the Domestic Buy-Side Creating a sizeable buy-side for newly created assets through the activities of asset managers, pension funds, insurers and the big pool of retail investment funds is a critical success factor. A major structural reform that will galvanise retail savings culture is required. Regulation, incentive plans, collective investment schemes and a governance plan on savings are some drivers for the requisite structural change.

The growth of the DCM has some key success factors and the market participants who recognise the evolving paradigm shift will naturally benefit from first mover-advantages and thrive. Some of these include:  Corporate Governance: Corporates that diversify their funding sources will reduce their dependency on banking credit to reduce costs and may also access longer-term funding for their capital expenditure investments at advantageous interest costs. Transparency of corporate financials and enhanced governance will be essential to reduce funding costs

Debt-focused OTC Securities Exchange: Investment banks, Securities Exchanges and Dealers serving as intermediaries between the investors and private businesses will create value for their clients as well as their stakeholders. Intermediaries who push the development of secondary markets will be leading market makers in the newly established markets. Nigeria has taken advantage of this factor with the introduction of FMDQ

Investment Management Expertise: Pension funds, insurers and other asset managers will find themselves in a high-growth market. Strong marketing activity will allow some players to penetrate new segments. Expansion of investment portfolios will require capacity building and expertise in a wider set of asset classes ranging from relatively traditional assets such as corporate bonds to less conventional ones such as infrastructure funds, mortgage-backed securities, asset-backed securities and securitisation products.

Risk Management and Capital Allocation: Agile banks will reallocate their capital based on economic value, across treasury, corporate and investment banking assets. A number of factors such as the availability of reliable benchmark curves for better assessment of funding costs will make the economics of corporate lending more transparent in Nigeria.

In conclusion, the development of the Nigerian DCM will require simultaneous support from a wide range of market stakeholders. While policy makers in Nigeria need to continue with the actions to encourage the growth of domestic savings, intermediaries and market infrastructure providers need to do more to educate issuers, investors and members of the public on asset classes such as money market products, corporate bonds, derivatives or asset management products.

Olaniyan is the Divisional Head, Market Development & Regulation, FMDQ OTC Securities Exchange.

Jumoke Olaniyan