Corporate Nigeria snubs bond market for lending market

Corporations in Nigeria have failed to take advantage of lower yields accessible from corporate bond listing as compared to the prime lending rate of 18.23 percent last reported in the country. Just 20 companies currently have corporate bonds listed on FMDQ.

Corporate bonds are long-term debt securities issued by corporations in order to raise finance for a variety of reasons, from building facilities and purchasing equipment to expanding their businesses.

With an outstanding value of N389.92 billion at an average yield of 15.66 percent, the value of corporate debt on FMDQ is far below the N15.23 trillion overall worth of loans collected by customers of Deposit Money Banks. A large proportion of the loans to customers is to corporate individuals at a rate above the prime lending rate.

Obinna Uzoma, a Lagos based economist told Businessday that “there are vast ways to negotiate interest rates when corporates want to borrow from banks but the requirements for listing with FMDQ might push a number of companies away, thereby having to deal with

just DMBS.”

Corporate bonds are usually characterized by higher yields than government bonds because there is a higher risk of a company defaulting than a government. They, however, can also be the most rewarding fixedincome investments because of the risk the investors must take on. A corporation’s credit quality is very important as the higher the quality, the lower the interest rate the investors receive.

The companies who are taking advantage of cheaper rates are Flour Mills of Nigeria, Union Bank of Nigeria (UBN), C&I Leasing, Nigeria Mortgage Refinance Company (NMRC) and UAC Property Development Company.

In reviewing the amounts listed by the companies, FMDQ admitted the listing of the Flour Mills N20.11 billion bonds, comprising N10.11 billion Series 1 and N10 billion Series 2 Senior Unsecured Fixed Rate Bonds under its N70 billion Bond Issuance Programme.

Union Bank listed N13.50 billion bonds, comprising N7.19 billion Series 1 and N6.31 billion Series 2 Senior Unsecured Fixed Rate Bonds under its N100 billion Debt Issuance Programme, while C & I Leasing listed N7 billion Series 1 Fixed Rate Bond under its N20 billion Bond Issuance Programme on both Exchanges.

Nigeria Mortage Refinance Company and UAC Property Development Company also listed N11 billion 13.80 per cent Series 2 Bond under the N440.billion Medium Term Note Program and N4.355 billion, 16 per cent series 1 senior guaranteed fixed rate bond on the NSE.

“If corporations want to borrow money at cheaper rates, meeting FMDQ requirements for listing corporate bonds is a strategical business move to reduce finance cost.” Uzoma addedanalysts at Chapel Hill Denham Ltd have retained their BUY rating on Lafarge Africa and raise their 12-month Target Price to N27.64 from N18.51 previously.

“Our revised forecasts capture lower debt of N53.70bn in FY-19E vs. N301.49bn in FY-18, so we forecast 44.1% yoy and 76.7% yoy reduction in interest expense in FY-19E and FY-20E respectively,” said analysts at Chapel Hill Denham.

“We highlight that the debt/ebitDA ratio of Lafarge Africa will drop significantly to 0.3x in FY-21E from 27.5x in FY-16, indicating a substantial headroom for the business to expand via new investments,” summed analysts at Chapel Hill Denham.