Developing the Fixed Income Market in Nigeria September 2010
Contents 1. Evolution Where we are coming from 2. Status Quo Where we are 3. Constraints Challenges to be overcome 4. The Future How to develop the market
Evolution of the Fixed income Market in Nigeria Nigerian Government Registered Stock in 1946 Federation of Nigerian Development Loan Stock in 1946 Federal Republic of Nigeria Development Loan Stock in 1963 Suspended in 1988 Issuance rejuvenated in 2003 with 1 st FGN Series Commencement of PDMM system in March 2006 Active secondary market commences in November 2006 Extension of the curve to 20 years in November 2008
The Current State of the Fixed Income Market in Nigeria The Fixed Income Market in Nigeria is made up of three major segments: Federal Government of Nigeria Bond, State Government Bond and Corporate Bond market. The Federal Government Debt Market is the largest and most developed of the segments. The FGN Debt Market dominates the fixed income Market in Nigeria. The amount of outstanding issuance in the Nigerian Debt Market is skewed towards Federal Government paper. The amount of FGN debt outstanding has increased from NGN1, 753 billion as at December 2006 to NGN3, 764 billion as at July 2010. NGN2,408 (63.97%) of the outstanding debt is FGN Bonds. The FGN Bond auctions are hld held under a Single Dutch Auction process. All bids areplaced through h the twenty one primary dealers. The risk free benchmark yield curve was lengthened to a 20 year maturity in 2008 The primary dealers The risk free benchmark yield curve was lengthened to a 20 year maturity in 2008. The primary dealers also provide liquidity to the FGN Bonds by quoting two way prices in FGN Bonds in the secondary market.
Outstanding Federal Government Debt
Outstanding Federal Government Debt by Sector INSTRUMENT DEBT MANAGEMENT OFFICE DOMESTIC DEBTS OUTSTANDING BY HOLDER TYPE AS AT 31ST MARCH, 2010 N'BILLION CENTRAL BANK BANKS AND DISCOUNT HOUSES NON BANK PUBLIC SINKING FUND TOTAL % FGN BONDS 1,499.8 673.7 2173.42 62.7% TREASURY BILLS 57 5.7 634.33 197.3 837.3232 24.2% 2% TREASURY BONDS 246.1 146.0 392.07 11.3% DEVELOPMENT STOCKS 0.0 0.1 0.4 0.52 0.0% PROMISSORY NOTES 63.0 63.03 1.8% TOTAL 314.82 2134.07 871.05 146.42 3466.36 100.0% % 9.1% 61.6% 25.1% 4.2% 100.0%
The Current State of the Fixed Income Market in Nigeria The secondary market comprises 28 institutions spread across banks and discount houses. Trading is usually transacted via the Reuters Dealing System and telephone. The Automation Committee of the Bond Dealers Workgroup is presently working on migrating to an electronic broking platform (ICAP). Trades are settled by Central Securities Clearing System/Central Bank of Nigeria. The secondary Market has experienced phenomenal growth since 2006. The value of transactions in August 2010 was NGN1, 023 billion compared to a value of NGN127 billion in December 2006. The value of transactions hitanall time highh of NGN2, 755 billion in March2010. The major holders of Government Debts are Banks and Discount Houses, holding about 69% as at March 2010.
Monthly OTC Bond Market Trades January 2009 to August 2010 MONTHLY REPORT ON OTC BOND MARKET (AS SHOWN ON THE GRAPH) PERIOD DEALS VOLUME (UNIT) FACE VALUE CONSIDERATION (#) Jan 09 10,804 1,532,720,208 1,532,720,208,000 1,560,882,799,753.53 Feb 09 8,382 1,327,944,090 1,327,944,090,000 1,354,485,010,021.37 Mar 09 6,064 1,042,892,475 1,042,892,475,000 1,046,144,533,797.64 Apr 09 9,224 1,307,991,432 1,307,991,432,000 1,361,856,129,090.78 May 09 9,260 1,494,028,125 1,494,028,125,000 1,532,946,452,248.78 Jun 09 8,086 1,579,242,973 1,579,242,973,000 1,613,109,769,593.48 Jul 09 14,968 1,998,402,073 1,998,402,073,000 2,163,697,750,553.24 Aug 09 8,481 1,032,893,382 1,032,893,382,000 1,140,239,598,056.27 Sep 09 14,863 1,714,589,536 1,714,589,536,000 1,900,550,179,991.15 Oct 09 17,704 1,649,364,015 1,649,364,015,000 1,934,276,134,838.34 Nov 09 16,264 1,377,064,968 1,377,064,968,000 1,739,594,894,650.94 Dec 09 8274 8,274 732,129,355 355 732,129,355,000 355 830,799,531,867.39 867 39 Jan 10 13,818 1,148,805,308 1,148,805,308,000 1,306,761,177,466.13 Feb 10 18,206 1,368,098,231 1,368,098,231,000 1,636,757,238,186.51 Mar 10 23,078 2,188,212,503 2,188,212,503,000 2,755,996,466,112.59 Apr 10 14,391 1,383,876,876 1,383,876,876,000 1,719,618,637,281.64 May 10 6,523 730,432,397, 730,432,397,000,, 871,426,870,980.91,, Jun 10 12,091 1,222,986,707 1,222,986,707,000 1,344,222,706,364.64 Jul 10 12,560 1,322,167,850 1,322,167,850,000 1,454,986,691,241.99 Aug 10 11,054 1,002,740,428 1,002,740,428,000 1,023,189,210,248.14 TOTAL 244,095 27,156,582,932 26,153,842,504,000 30,291,541,782,345.50
The Current State of the Fixed income Market in Nigeria The State Government Bond is the second largest segment albeit by some distance. There are currently five states with outstanding debts in Nigeria. The states include: Imo, Lagos, Niger, Kwara and Bayelsa. The proportion of outstanding State Government Debt is miniscule compared to the amount of federal government debt outstanding. State Government Bonds were historically not considered liquid assets. However, on April 14, 2010 the CBN issued guidelines for granting liquid asset status to State Government Bonds. The Corporate Bond Market remains the smallest segment. There are currently only two outstanding issues (GTBank & UPDC). Secondary market for corporate issues is virtually non existent because of the small issue sizes and the absence of a registered Over the Counter market. The Financial Market Dealers Association(FMDA) with the support of the CBN is in the process of setting up an OTC platform which would greatly enhance the tradability of corporate and sub national debts. To encourage the development of the sub national and corporate bond market, the Nigerian Stock exchange and the Securities exchange commission has reduced issuance costs and eliminated issuance bottlenecks.
Issue Size of Soveriegn,sub national and corporate bonds The Nigerian Bond market is dominated by Federal Government issues,which is about 90.50% of domestic debt market, it is expected that NGN 1.3trillion ($8.6bn) would be issued in 2010.However an upsurge in the issuance of sub national bonds has also been witnessed and the corporate bond market is expected to take off given the support of the Federal Government on the initiative. Nigerian Bond Market - Issuer Distribution Maturity Profile 700 600 500 Federal Government State Government Corporate NGN 'bn 400 300 200 corporate state Federal Govt 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2028 2029 2030 Year
Outstanding State Government &Corporate Bond State Government Bonds Corporate Bonds Issuer Maturity Date Tenor Coupon Outstanding Issue Rating/Rater Bayelsa State 30-Jun-17 7 years 13.75 50 billion B /Fitch Issuer Maturity Date Tenor Coupon Outstanding Issue Rating Kwara State 5-Aug-14 5 years 14% 17 billion B+ / Fitch UACN Property Development Company (UPDC) Aug-15 3 years 10% 15 billion A- /Agusto & co Lagos State 9-Feb-14 5 years 13% 50 billion BB- /Fitch Lagos State 19-Apr-17 7 years 10% 50 billion BB- /Fitch Flour Mill of Nigeria TBA 3 years 10% 35 billion A /Agusto & co Niger State 7-Oct-14 5 years 14% 6 billion A /Agusto& Co Guaranty Trust Imo State t 30-Jun-16 7 years 15.50% 50% 18.50 billion A+ /Agusto& Co Bank kplc Dec-14 5 years 13.50% 13 biilion BB- /Fitch
Factors that have hindered the development of Fixed Income Market in Nigeria Education & Awareness A large number of end users do not have a proper understanding of the Federal Government bonds, while some others are not even aware of its existence Transparency of Markets The ability to get information as regards activities in both primary and secondary markets can sometimes be challenging to end users Short term investment culture The paradigm shift in investment horizon has been gradual, as most liabilities generated are short dated Lack of depth in Issue Size For most of the sub national and corporate issues, there is a lack of depth which makes trading liquidity a challenge Commercial Paper market Prior to the issuance of new guidelines regarding CP issuance, corporate found the financing means easier and cheaper As yet, there is still little understanding of the market risk implication of dealing in Fixed income securities y, g p g (especially price risk) among market operators
Factors that have hindered the development of Fixed Income Market in Nigeria Ease of raising money from equity market Prior to the price correction and investor losses incurred on the Nigerian stock exchange, equity was the preferred mode of raising capital Over Dependence on bank lending High implied cost of borrowing The various regulatory costs associated with bond issuance still makes it unattractive Regulatory Bottlenecks Though the NSE/SEC have tried to make bond issuance easier, issuers still encounter various bottlenecks in the process Absence of a registered Over the Counter (OTC) platform for corporate and sub national bonds
Measures for Developing the Fixed Income Market in Nigeria - PDMMS Professionalism Prompt response to customer enquiries as regards Bond market Efficient execution of customer trades Pricing Confidentiality of end user transactions Commitment to ethical market conduct by operators Market development Development of the repo market Constant review of market practices to meet global best standards P d D l Product Development Constant interaction with DMO and other regulators to help develop corporate bond market
Measures for Developing the Fixed Income Market in Nigeria - PDMMS Transparency of markets Prompt provision of bond prices on demand Free flow of market information Develop a benchmark yield curve and providing a pricing platform for corporate bond issuance Development of an OTC platform to enhance efficiency, transparency and credibility of fixed income market Educate investors and general public Organising seminars and workshops Customer Investment forum Robust web pages and improvement in IT infrastructure Educative displays at branches
Measures for Developing the Fixed Income Market in Nigeria - DMO Continue with public sensitization on FGN bonds Use of print media, bill boards, television and radio Seminars and workshops Provide incentives to investors/pdmms Tax breaks Fees to PDMMs for customer winnings Continue to Educate the media Organise specialized ili seminars for journalists and media practitioners ii
Measures for Developing the Fixed Income Market in Nigeria - DMO Product development Collaboration with other stakeholders to develop corporate and state bonds Inflation Index linked bonds for Pension Industry Buy back rump stock Creation of deep benchmark bonds on the sovereign curve to curb the proliferation of small FGN issues Deepen Issues to ensure normal yield curve Improve regulation of PDMMS to ensure market risk is properly managed Create functional state DMOs Deepen grassroot participation Increase awareness of the bond market Transparency of Auctions Automation of auction process
Measures for Developing the Fixed Income Market in Nigeria FGN Financial sector reforms Insurance sector reform Mandate Pension funds to keep a specified minimum portfolio size in FGN Bonds Market reforms Create enabling environment for issuance of corporate bonds( listing requirements) Support the development of a world class OTC platform