High-yielding government debt instruments crowd out private sector

Nigerian companies are on course to face a funding squeeze as investors flock to high-yielding government debt instruments, analysts warn.

Last week, the Nigeria Treasury Bills auction saw strong investor demand with a stop rate 21.49 percent and true yield of 27.3 percent.

The FGN Savings Bonds are currently issued at 15 and 16 percent for the two-year and three-year bonds respectively, and the recent OMO bills auction was oversubscribed to the tune of N1.01 trillion, over three times the N350 billion on offer at a stop rate of 21.5 percent.

Oladipo Samuel, senior portfolio manager at Lead Asset Management Limited, raised concerns about the implication of the rise in federal government rates on companies.

“With rates on federal government instruments currently at an average of 19 percent, it means that corporates must offer a more competitive rate on their instruments to attract investors. And when this happens, they will be incurring more interest expense than usual,” he said.

He added that as a result, the average yield on commercial papers (CP) has increased. “For example, the average yield on commercial papers is currently around 21 percent whereas as of this time last year, the average yield was around 17 percent.”

“This means aside from the overhead cost that has increased due to the recent policies of the government, companies now have to battle with increased borrowing costs. Overall, this is not good news for companies,” Samuel said.

Big companies like MTN Nigeria Communications Plc, Flour Mills of Nigeria Plc, GZ Industries Limited, Dufil Prima Foods Plc, C&I Leasing Plc and Saroafrica Funding SPV Plc have tapped the CP market. Nigeria’s inflation rate has witnessed a 13-month consecutive increase to 29.9 percent.

As at December last year, MTN Nigeria, which carried out four commercial paper transactions, recorded a value of N247 billion at an issue yield of 13.5 percent, 16 percent, 13 percent and 16.5 percent.

Joshua Joseph, a fixed-income at CSL Securities, said that the hawkish stance of the Central Bank of Nigeria (CBN) is normal to curb the inflationary pressure and to ensure there is a balance.

He however said borrowing cost will increase because investors will seek for high returns due to the high interest rate environment and will increase the borrowing cost of any company coming into the market to tap into commercial paper and corporate bonds.

“The impact will be very high yield bonds for corporates that don’t have a very good credit rating, but companies with very good credit ratings though their borrowing cost will be high, its rate will only be a bit above what the government bond is doing,” he said.

He said that the premium corporates with low credit rating will be adding to their bonds will be very high.

“We’ve been seeing different commercial paper issuance coming into the market at this point in time issuing at very high rates at 22 percent for 270 days and 18 percent for 180 days,” he said.

He also said that the cost of business will be high because banks have increased their lending rates, adding that companies might not be able to afford it and will reduce borrowing.

Ore Odetunde, a research analyst at Anchoria Asset Management, said when interest rates start to rise significantly, it crowds out private sector investment and financial flexibility, as it becomes more expensive for companies to borrow funds from the capital market.

“As a result, lending activities will thin out and issuers will have to reassess their borrowing needs due to the high cost of funds,”

Oretunde said corporates that tap into the market now may do so out of necessity, reflecting signs of tight liquidity and potential desperation to secure funding at prevailing rates.

BusinessDay analysis of data from FMDQ showed that more companies issued CPs in February last year compared to this year. There were 17 CP issuances as at February 2023 compared to eight in February 2024.

Nigerian banks have started increasing their lending rates following the record hike by the CBN, a development that will see businesses and individuals with existing loan facilities with the banks pay more to service those loans.

Zenith Bank raised its interest rate by 500 basis points to 30 percent from 25 percent. The review takes effect from March 12, 2024. Several other banks are expected to follow suit.