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The trouble with bond yields and changing investors’ appetite

Chief Executive Officer (CEO) of the Nigerian Stock Exchange (NSE), Mr. Oscar Onyema

Investors have raised concerns over the current high yields on securities and money market instruments, saying such returns impede the rebound of the equity market.

The investors, who argued that the high yields cast doubt on the resurgence of Initial Public Offering (IPO) in the market, urged the Monetary Policy Committee (MPC) to review the interest rate while the Central Bank of Nigeria (CBN) makes conscious efforts to reduce the yields on treasury bills (TBs) and other instruments to buoy investment in equities and resuscitate IPO.

Indeed, the secondary market segment of the Nigerian Stock Exchange (NSE) that is supposed to excite issuers and spur primary market activities for IPOs have witnessed fewer activities in the last few years.

An IPO is the first time that the stock of a private company is offered to the public. Smaller, younger companies seeking capital to expand often issue IPOs, but they can also be done by large privately owned companies looking to become publicly traded.

Investors have blamed the high money market yields and interest rate for the diversion of investors’ attention to the fixed income and debt instrument market at the detriment of the equity market.

The preference for the money market and debt instrument arises from the fact that returns on such facilities, which are loaned to government or corporate bodies, are guaranteed with high yields for the fixed period of their tenure, unlike stocks which are exposed to the vagaries of market forces as they are traded daily.

For instance, with 18 per cent on TBs, investors prefer to invest in them and other securities and instruments, because their yields are currently high. Similarly, the introduction of the Federal Government of Nigeria Savings bonds and Sovereign Sukuk in 2017 is also expected to diversify sources of government funding, as well as investors’ base of the domestic bond market

The savings bond offers 13 per cent coupon rate with a minimum subscription of N5,000 and a maximum of N50million. The benefit of this bond is that the interest income is tax-free. Investors believe that it pays more to invest in savings bond than equity at the moment because of the high coupon, since equity prices on the NSE are becoming too volatile.

Furthermore, since the bondholder enjoys interest every quarter, it makes it possible for individuals to plan and save towards personal projects. The savings bond is considered liquid, as it would be tradable on the NSE. It can also be used as a collateral for loans, offers guaranteed returns, and encourages financial inclusion among low-income households. It enables individuals to enjoy those benefits, which accrue to high-net-worth investors in the capital market.

The Debt Management Office (DMO) said: “The Federal Government of Nigeria bond primary market is envisaged to remain robust, supported by demand from domestic investors, especially the pension funds, while yields in the secondary market are expected to fall as inflation expectations decrease.”

A former Director General of DMO, Abraham Nwankwo, said the initiatives included the use of benchmark by the Federal Government bonds to enhance liquidity, amendment to existing guidelines, or issuance of new guidelines by regulators to simplify issuance process.

Others are reduction in issuance and transaction costs, widening the investor base, sensitisation of potential bond issuers and regular interactions with investors and other stakeholders.

The commercial paper (CP) market in Nigeria has also recorded significant activity, with the largest issuance to date in 2017 by Access Bank. Issuances increased by 137 per cent in value between 2015 and 2016, and as at Q2 2017 constituted about 58 per cent of the value of 2016 issuances.

CP issuers represent diverse sectors – REITs, banking, and fast moving consumer goods (FMCG) companies, signaling increased interest across all Nigerian corporates.

However, unlike the bond and TB, commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range longer than 270 days.

The plethora of these monetary instruments has caused the nation’s stock market to remain non-competitive compared with its peers in other emerging countries due to the high level of volatility that has pervaded the market since the post-global recession.

However, some listed firms have approached the market for rights issues to existing shareholders, an indication of restoration of confidence in the investing public, largely due to reforms in the secondary market, which attracted both foreign and local investors to the market in the past few months.

Regrettably, only Seplat Petroleum Development Company Plc and Transcorp Hotels Plc made IPOs. While Seplat, which was a global IPO, was 100 per cent successful, Transcorp recorded 50 per cent subscription.

Seplat’s shares commenced trading on the floor of the NSE on April 14, 2014 following the successful completion of its IPO. The company which announced its intention to float on March 11, 2014 had sought to raise $500 million, and then listing on the NSE and LSE.

On Thursday March 28, 2014, the company announced that the indicative price range for its initial public offer had been set at N535 to N700 per ordinary share for shares to be listed on the official trading list of the NSE and 195 pence to 255 pence per ordinary share for shares to be traded on the LSE’s main market.

For Transcorp Hotels, its IPO was opened to the investing public between September and October 2014. The company has raised N4.2 billion ($23m) from its recent initial public offering, indicating a 52 percent subscription level. Although the hotel was unable to raise its full target amount, market analysts said that given the bearish trend in the Nigerian capital market in the last quarter of 2014, the result of Transcorp’s IPO indicated a high level of confidence by investors in the company, targeting to raise N8 billion, offering 800 million shares at N10 per share.

The firms that signified interest in coming to the market last year suddenly developed cold feet – prominent among them being MTN Nigeria, Airtel Nigeria and Promasidor Nigeria.

Consequently, debt to equity ratios have risen sharply in the last few years, as investors pull money out of the stock market, making IPO resurgence doubtful.

Against this backdrop, analysts noted that IPOs cannot thrive in an environment where the secondary market is not vibrant, adding that when interest rate increases, it favours fixed income investments and it drives assets from equity.

“In portfolio management, the logical assumption is that relationship between interest rate and stock market is inverse. This implies that when interest rate is low, speculators move their funds from the money market instruments to the stock market to make a kill.

“As a corollary, the same speculators move from the stock market to other asset classes, especially, fixed income securities when the interest rate is high. By this logic, one can assume that the current increase in the monetary policy rate (MPR) would boost investment in the fixed income securities, while it may depress investors’ appetite for equity investment,” a source said.

The Founder, Independence Shareholders Association of Nigeria, Sunny Nwosu, maintained that investors would not shun money market instruments that attract profitable yields for volatile equity market.

“If you do not have a strong heart, you will exit the capital market. Government is not helping the capital market. All the products that government introduced are removing values from instruments in the capital market. Most investors in the capital market will not want to wait for a long time, but get out after seeing a profitable appreciation and attractive interest the money market offers without fluctuations.

“The little recovery witnessed in the market so far may not be sustained because when investors opt for money market instruments, the secondary market may become less attractive for issuers to patronise the market for IPO. I invested N100 million in the market, but last time when I checked, the value has depreciated to N60million, close to 50 per cent loss. The instruments in capital market cannot offer 10 per cent dividend at a stretch, while the money market is paying 13 per cent.”

To the National Coordinator, Renaissance Shareholders Association, Olufemi Timothy, unless the Monetary Policy Committee (MPC) reviews the interest rate, issuers would not see a better advantage in the equity market for IPOs.

“We are concerned on the sustainable recovery of the market, and to achieve this, government must review the interest rate to bring all these investments back to the stock market. This would spur activities in the market, and attract new companies to float IPOs.

“High money market yields affect the stock market because you have the same investors coming into the market, and they invest where the yields are high. Bonds of 17 per cent will definitely affect IPOs. CBN’s policy on interest is not encouraging. If CBN adjusts the monetary policy, and reduces interest rate, people will see better advantage in IPOs,” he said.

The President, Constance Shareholders Association, Shehu Mallam Mikail, noted that bonds and government instruments are already crowding out funds from the equity market.

According to him, because of the attractive coupon rate (interest rate), and frequency of payments, these instruments hold more promises for every segment of investors.

He added that high interest rate, which is already taking money away from the capital market, would ultimately depress issuers’ appetite to approach the market for initial offerings.



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