The value of corporate bonds issued by Nigerian companies dropped by 98 percent between the last quarter (Q4) of 2022 and the first quarter (Q1) of 2024 on high yield demand by the lending public, BusinessDay analysis of FMDQ Securities Exchange Limited’s latest data has shown.
The value of corporate bonds in the first three months of 2024 dropped to N5.5 billion in Q1 2024 from N249.4 billion in Q4 2022, representing N244 billion or 98 percent decrease over the period.
Similarly, the value of commercial papers (CPs) issued by firms dropped to N331.81 billion in Q1 of 2024 from N537.47 billion in Q1 of 2023, representing a 38 percent slump over the period. In Q4 2022, CPs were much lower at N148.72 billion.
Bonds and CPs are both fixed income/debt instruments deployed by corporations and the government to finance projects. Bonds attract coupon payments at intervals but CPs have no coupon payments, financial experts say.
“Companies are reluctant to take debt at these levels. When one-year Nigerian Treasury Bills (NTBs) yields are at 25 percent, these companies would have to issue commercial papers at a premium to that,” said Opeyemi Babalola, portfolio manager at Comercio Partners Asset Management, said.
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“We’ve seen a few companies issue commercial papers (CPs) above 30 percent recently. That’s not very sustainable in terms of profit margins,” Babalola said.
He noted that on the corporate bond side, there has hardly been any recent issuance because it’s not very prudent for any chief financial officer to advise his/her company to lock in long-term debt at the current high-yield levels.
The significant rise in yields on both government and private instruments in Nigeria’s fixed income market stems from the Central Bank of Nigeria (CBN)’s hawkish monetary policy stance which focuses on reducing financial systems liquidity and hiking interest rate to rein in inflation.
The yield on one-year Nigerian treasury bills rose to 26.76 percent in March 2024 from nine percent in January 2024. It once peaked at 27.33 percent in March 2024.
This year, to battle galloping inflation rates, the Yemi Cardoso led Monetary Policy Committee has hiked interest rates three times by 750 basis points.
The first quarter witnessed an initial 600 basis point-increase to 24.75 percent from 18.75 percent last year. In May 2024, there was another 150 basis-point increment to 26.25 percent.
Companies that issued CPs in the period under review included: Afrinvest West Africa Limited, FBN Quest Merchant Bank, UAC of Nigeria, and Coleman Technical Industries Limited.
The issuers of CPs in the period under review were mainly from the financial services, agriculture, manufacturing, health, pharmaceuticals, and retail sectors.
Another means of financing huge costs for many companies in Nigeria is loans from banks.
Currently, rates on commercial banks’ loans have risen on the back of the monetary policy rate (MPR) hike by the central bank. Interest rates in deposit money banks (DMBs) range from 30 percent to 40 percent, findings have shown.
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“When companies start to release their half-year 2024 numbers, you should start to see the effect of the higher borrowing rates on their finance cost (or what some call interest expense) numbers,” Babalola said.
Already in the first quarter of 2024, top 30 firms on Nigeria’s stock exchange recorded a combined 126 percent surge in interest expense on the naira devaluation and jumbo interest rate by the CBN.
Gbolahan Ologunro, portfolio manager at FBNQuest, said that it is relatively cheaper for companies to raise funds through bond issuances or commercial paper than via loans.
He said the macro environment has reduced appetite for fund-raising activities because the return on investment is currently weak.
“So, I think it’s a blend of two factors. The cost has gone up, and the macroeconomic situation does not really support such attractive returns on investment, given the high level of cost even associated with fundraising activities,” Ologunro said.
Babalola further explained that the running costs for businesses are increasing, and they are not able to raise prices without some sort of drop in quality demanded from consumers.
“The purchasing power of consumers is declining because of rising inflation. So, it puts these companies in a very delicate position. You will see all these reflected in the earnings of publicly-listed companies in the consumer space once we enter peak results season by the end of July,” Babalola said.
Corporate bonds value declined by 88 percent to N5.50 billion in the first quarter of 2024 from N43.50 billion the last quarter of 2023, FMDQ 01 data shows.
Coronation Research, in a recent report, said that short-term (T-bill, commercial paper) rates will remain high for the rest of this year, but without causing bond rates to move up as high.
“We expect yield curve inversion to persist,” the research firm said.
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Joshua Joseph, fixed-income analyst at CSL Stockbrokers Limited, attributed the decline in private borrowing to the uncertainty in the economy and high cost of doing business.
Joseph said the credit risk (likelihood of default) has increased and is forcing investors to demand for more premium. He noted that the rate at which loans are secured from banks will increase because it can be structured in various ways which might not be available in the capital market.
“As a result of this high cost of borrowing, interest expense is at high levels and companies that can’t fully pass the cost to end consumers might be declaring huge losses,” he further said.
