Rising borrowing cost scares companies from corporate bonds

Nigeria’s corporate bond activity which had peaked in 2022 has seen remarkable decline since 2023 till the first half (H1) of 2024.

In 2019, corporate bonds issued in Nigeria worth N177billion. In 2020 it was N368billion, while in 2021 corporate bonds worth N312billion were issued. In 2022 corporates issued bonds worth N688billion, before it dropped to N141billion in 2023, FMDQ and PwC research data showed.

In a bid to address rising inflationary pressures while simultaneously creating an attractive environment for foreign investment, Nigeria’s Monetary Policy Committee (MPC) has been aggressive in raising policy rates.

“The Monetary Policy Committee (MPC) is expected to maintain the policy rate unchanged in H2 2024, with a potential first interest rate cut projected in March 2025,” United Capital research analysts said in their H1-2024 review and H2-2024 outlook.

Rising from its two-day meeting in July, the Monetary Policy Committee of the Central Bank of Nigeria raised the Monetary Policy Rate (MPR), also known as the benchmark interest rate, to 26.75 percent from 26.25 percent.

“In the first half under review (H1-2024), cost of capital for corporates spiked dramatically in tandem with the CBN’s hawkish stance, with the CBN declaring a cumulative +750 basis points (bps) hike in its benchmark interest rate (MPR), which closed the half year under review at 26.25 percent from 18.75 percent as of December 2023,” United Capital analysts further said.

“Given the desperation for hot money to revive the FX market, the CBN looked to forgo the negative impacts of elevated cost of capital on the profitability of corporates amid the poorly conditioned business climate in Nigeria. The CBN’s strategy was to rein down inflation by improving FX stability,” they added.

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While companies are cautious of corporate bonds due to rising borrowing cost, the Nigerian stock market continued to grow despite bitter double-digit inflation.

Due to challenging economic realities affecting the business environment and the unavailability of foreign exchange (FX) to cover resource input needs, Nigeria has seen notable exit of multinational corporations in the past year.

The recent PwC update on Nigerian capital market shows corporate bond activity (2019 to June 2024), noting that only one corporate bond was issued in first half (H1) of this year, making it the lowest corporate bond issuance in the last five years.

“The bond was issued by Eat & Go Finance SPV Plc. Three corporate bonds valued at N47.15billion were however issued between July 2023 and June 2024,” the report noted.

The Nigerian capital market update report is an annual research report providing useful insights on the domestic capital market as well as some major activities in the domestic, regional and global markets. The report covers events from July 2023 to June 2024.

However, it noted that the NGX performed better than several of its peers in H1 2024, recovering from its second position in Q4 2023.

“Exchanges around the world recorded positive market returns, driven majorly by the growing interest in equities of tech companies. The FTSE 100 (5.20percent), Hang Seng (3.96percent), FTSE SA (3.66percent), Nairobi ASI (18.87percent), EGX 30 (11.54percent) and S&P 500 (15.29percent) all recorded positive returns in H1 2024. Nairobi ASI and Hang Seng recovered from their December 2023 negative growth position.

“NGX Banking Index dropped by 7.4 percent to 830.20 points in June 2024 from 897.20 points in December 2023, due to the uncertainty associated with the CBN recapitalisation directive in March 2024. Some banks made public offers and rights issue programmes in the Nigerian market, while others are seeking international capital to meet up with the new requirement,” PwC said in the July report.

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“Several factors which contribute to inflationary pressures persists such as the removal of fuel subsidy, the volatile exchange rate and the disruptions in the food supply chain. Despite the hawkish stance by the CBN to maintain stability, Nigeria’s outlook is still quite uncertain as investors remain cautious of a complex and ambiguous macroeconomic environment,” PwC further noted.

“The Federal Government and corporate entities scaled back from bond issuances amidst rising cost of borrowing. Companies have steered away from issuing bonds due to the fast-rising cost of borrowing. This is a direct result of the Central Bank’s decision to increase the monetary policy rate to curb inflation. There was an 83 percent decline in corporate bond issuances in H1 2024,” PwC noted in the July report.

Likewise, commercial paper (CP) issuances witnessed a decline in the first half of the year with 76 issuances compared to 104 in the previous year. In the first half of 2024, a total of N503 billion was raised in 76 commercial paper issuances by 32 entities.

“This is a significant decrease of 37 percent in value and 27 percent in number of issuances compared to the same period in 2023 possibly attributed to rising interest rates, which makes borrowing less appealing to issuers.

“The industry spread shows that the manufacturing sector was the dominant player accounting for 63 percent of the total issuance value, followed by the financial services industry contributing 19 percent to the overall figure, with agriculture and consumer foods having 2 percent and 7 percent respectively, and 9 percent represented issuances from other sectors. Dangote Sugar Refinery Plc was the highest issuer in H1 2024, with a 28 percent deal share (N142 billion),” the report noted.

“The yield on the benchmark 10-year FGN bond increased by 281 basis points from 14.69 percent in June 2023 to 17.5 percent in June 2024. This can be attributed to the macroeconomic headwinds in the country such as the rising interest rates and inflation rates.

“The Federal Government issued N6.25 trillion worth of bonds between July 2023 and June 2024, a 59 percent decline from the bonds issued in the prior period. 0.52 percent of these bonds representing N32billion are savings bond, 5.6percent (representing N350billion) sukuk and 93.9 percent (representing N5.9 trillion) plain FGN Bonds.

“In the first half of 2024, a total of N503 billion was raised in 76 percent commercial paper issuances by 32 entities. This is a significant decrease of 37percent in value and 27 percent in number of issuances compared to the same period in 2023 possibly attributed to rising interest rates,” PwC further noted.