After 8-year lull, Nigeria municipal debt capital raising off to flying start

• Lagos State’s N100bm bond first at the post
• More municipal issuances coming‭ ‬
• Chapel Hill Denham‭,  ‬Vetiva‭, ‬Kairos‭, ‬FBNQuest‭, ‬Coronation‭, ‬others lead charge

Issuing houses, trustee firms, finance and investment advisory firms and stakeholders in the Nigerian debt market are getting set to have a bigger year raising funds for developmental projects, growing returns for investors and contributing towards improving overall wellbeing of citizens.

Just last week, the culmination of a one month, book building process to raise N100 billion in bonds, for the commencement and continuation of infrastructural projects in Lagos State took place. Although the projects to be “continued and commenced” remained vague, Jide Sanwo-Olu, the governor of Lagos State promised not to betray the confidence of investors that subscribed to the bond. He pledged that the funds would be disbursed strictly to finance infrastructural projects required to boost the state’s economy

Chapel Hill Denham (CHD) a Lagos based advisory firm, led 13 other issuing houses in the successful completion of the debt programme. 315 bids from institutional investors and high net worth individuals were made, but only 208 bids qualified under the terms of the offer at the clearing price of 12.25 percent.

According to Governor Sanwo-Olu, it was a historical moment for the state. This is because it is the first subnational bond with a ten (10) year tenor to mature in 2030, it recorded an oversubscription of 196 percent, and it is the largest amount ever to be raised by a subnational. It is the third series of a N500 billion bond issuance programme, which the Lagos State government commenced in 2016 under former governor, Babatunde Raji Fashola, Nigeria’s current minister of works and housing.

The brains behind the issuance

With such a big issuance coming at the start of the year, analysts are projecting 2020 to be the best year for municipal issuance activities in the local debt market, following an eight-year lull.

“Lagos already opened the year with a big bond issuance, so we are set to have the best municipal issuance year since (at least) 2012,” said Abimbola Omotola, macro and fixed income analyst at Chapel Hill Denham.

Omotola’s view was equally held by Usoro Essien, head of research at Vetiva Capital, one of the joint issuing houses on the Lagos State bond when business a.m asked him. “Yes, it is very likely,” Usoro said, when asked if he thinks more municipal bonds will be issued this year.

Even though Lagos State is currently profiled as the state with the highest debt profile for both external and domestic debt among the 37 sub nationals in the federation, the ability to pull off an oversubscription rate of up to 196 percent was attributed to the name backing the issuance.

Omobola Adu, research analyst at Research, Growth and Development Asset Management told business a.m that investors will have a bit of relief seeing that Chapel Hill Denham is the lead issuing house and book runner of the debt issuance programme. Their reputation is at stake, investors know this and that is what they bank on, Adu explained.

One thing that contributed to the high score for CHD was its ability to restructure Lagos State’s balance sheet. With a 29 percent debt portfolio as at the end of 2019, the state was precariously balanced over a 30 percent threshold. This was a position which well-meaning Lagosians had expressed caution on.

However, Sanwo-Olu stated during the signing ceremony that the partners within a three month period helped Lagos to restructure its balance sheet and reduce the state’s interest expense by N17 billion. This accomplishment, gave Lagos the opportunity to raise the bond from the capital market, Sanwo-Olu said.

Chapel Hill Denham is known for its pace setting efforts in raising funds for infrastructural development. It is the only fund in the Securities and Exchange Commission’s (SEC) infrastructure fund category. In 2019 it doubled its asset value and contributed N23.05 billion to the overall growth of mutual funds in the debt capital market

CHD is also a 6-time recipient of the Euromoney award, for Nigeria’s best investment bank. According to the firm, their investment decisions and advise are made based on “meticulous research”.

In 2020, CHD has already been involved in closing deals worth over N360 billion (International Breweries’ N164 billion rights issue and Nigeria’s N100 billion Infrastructure Debt Fund), including being the exclusive and sole financial advisor to Union Bank on the divestment from its UK subsidiary.

Other issuing houses and bond’s book builders

There are important roles to be played by all 14 issuing houses and advisors. This is particularly important if the state is to avoid a crashing deal like the Visionscape transaction, which the market witnessed last year.

To shed more light on the management of the fund, Kairos Capital, one of the joint issuing houses led by Sam Chidoka, listed security as one of the benefits of the bond. According to the investment house, the bond will be serviced from a consolidated debt service account (CDSA) and an irrevocable standing payment order (ISPO). This feature was described by RGDAM’s Adu as paramount to regulating the management of the bond, in terms of gaining approvals for withdrawals and structured payments.

Another benefit sold by Kairos Capital towards signing on investors to the bond was its explanation on the bond’s attractive yield, noting that it was a better investment option at the moment, as interest rates on bonds are currently greater than treasury bills.

It also sold the fact that diversification options with better risk-adjusted returns was possible with the bond. Low volatility, which the firm noted to be lower than equities as bonds do not suffer from day to day volatility like stocks, and liquidity, were mentioned as part of the benefits that won investors over.

Comercio Partners, another issuing house that collaborated on the book building process for the Lagos State bond, stated that the facility was issued to qualified institutional investors and high networth individuals only.

Also sharing the spotlight in the success of these firms regarding this issuance are FBN Quest, a firm whose money market fund generated the second highest contribution to overall growth in mutual funds last year, Coronation Merchant Bank, SFS Financial, FCMB capital, Stanbic IBTC Capital, United Capital, Vetiva Capital, Lead Capital, Phoenix, Radix, Quantum Zenith and PAC Trustees Limited.

2020 outlook for debt market

Overall, the debt market is poised to be more active this year. Highlighting CHD’s outlook for 2020, Omotola, mentioned that, although they expect macro-economic vulnerabilities to make 2020 a volatile year, a lower level of issuance by the federal government will potentially support the fixed income market in terms of yields.

Capital raising plans as revealed by the Debt Management Office (DMO) indicates that the federal government will reduce local currency bond issuance in favour of foreign currency bonds this year.

Omotola further explained that this decision was responsible for the static position of bond yields following the hike of the cash reserve requirement (CRR) by the Central bank to 27.5 percent two weeks ago. This decision, he said, is thus leading to an increased expectation of issuances from the corporate debt market.

He quoted the DMO to have disclosed a N1.53 trillion fund raising plan by the federal government in 2020. This, he said, is because the government intends to continue pursuing a rebalancing of the country’s debt mix for more external debt. Hence, the “FG [federal government] is planning to do $2.8 billion to finance budget, compared to none raised externally in 2019.”

The lower level of local currency issuance by the federal government will potentially support the fixed income market in terms of yields, he posited.