Leveraging Bond Market for Growth

Goddy Egene writes that companies have been taking advantage of the capital market to raise bonds to fund their operations for growth and improved returns Operating in the Nigerian economy has been a big challenge for companies in many ways. To operate successfully in Nigeria, companies have to provide virtually all their needs- electricity, water and others.

All these bring extra operational costs, which reduce the profitability of businesses. The cost of operating has even gotten worse given the high inflation that is above 18 per cent. This implies that for a company to operate, it was must have enough capital to be able to fund it capital and operational expenses.

Again, having access to funding is not very easy for many of the companies. The equities market, which used to be a very good source of funding, has remained mostly inactive for many years due to investor apathy. The difficult economic situation has made it unpopular for investors to save and invest in equities. Hence, that segment of the capital market has provided little funding for corporate. Those who access funding there, do so through rights issues.

However, most listed companies and some private ones have found the bond segment of the nation’s capital market to be way out.
The debt capital market has assisted many companies listed on the Nigerian Exchange Limited (NGX) to access capital with relatively low coupons below 10 per cent.

Between January and now, companies have raised over N230 billion from the debt market through bonds issuances. For instance, BUA Cement Plc raised the highest of N115 billion. Fidelity Bank Plc raised N41.213 billion, while Flour Mills of Nigeria Plc got N29.8 billion. Also, some firms not listed on the NGX have taken advantage of bond market to raise fresh funds to boost their performance.

Also, NOVA Merchant Bank raised N10 billion, while Mecure Industries accessed the market for N3 billion, while Emzor Pharmaceuticals raised N13.7 billion. CardinalStone Financing SPV Plc raised N5 billion. TSL SPV similarly got N12 billion from the market.

The Divisional Head, Listings Business, NGX, Mr. Olumide Bolumole said the exchange continued to provide issuers with a platform that allows them meet their strategic business objectives and it is the exchange’s delight to see issuers take full advantage of our products and services to support their growth story.

Some of the issuers have expressed excitement and satisfaction over the ability to access capital from the market and list the securities on the exchange so as to provide liquidity for investors.

For instance, the Group Managing Director, CardinalStone Partners Limited, Mr. Michael Nzewi, said: “It is particularly exciting for us at CardinalStone because it represents the attainment of our aspiration to list some of the securities in our capital structure on the exchange. We are thankful to NGX for giving us the opportunity to list on its platform; without their support, we would not be here today.

“We would like to assure NGX that we are committed to finding ways to leverage its products and services and drive participation in the capital market from other institutions. Of course, we appeal to our colleagues in the industry to take advantage of the opportunity to raise capital on NGX just like we have.”

Speaking in a similar vein, Managing Director, CardinalStone Asset Management Limited, Mr. Mohammed Garuba, said: “I thank NGX for the opportunity and must give kudos to NGX for facilitating seamless remote trading over the past year; the impact is clearly seen in capital raising activities on the bourse.

“I must also congratulate NGX on the recent launch of its campaign, The Stock Africa Is Made Of. It is indeed an exciting initiative as it has helped to re-engage key players within the capital market value chain. While a lot of focus has been on equities in the past, listing a bond is another way to not only raise capital but also improve governance within an organisation, which was our experience. We have learnt from this process, and are willing to support counterparts and clients who wish to embark on this journey.”

The N115 billion bond raised by BAU Cement Plc, which is the first bond issuance by the company, is also the largest corporate bond issued in the Nigerian debt capital market,

The proceeds from the issuance, according to the company, will be used to refinance existing debt obligations of the issuer, finance the issuer’s working capital as well as fund its Debt Service Reserve Account. BUA Cement is the second largest cement producer in Nigeria and the largest cement producer in the North Western region of the country.

Commenting, on the bond issuance, the Chairman, BUA Cement, Abdul Samad Rabiu, said: “This is the largest corporate bond issue in the history of Nigeria’s DCM. In 2020, we made a strategic decision as a proudly Nigerian company to list the shares of BUA Cement.
“This was in line with our core strategy to continue seeking out viable investment and growth opportunities within Nigeria. This bond issue – a first by BUA Cement, demonstrates our confidence in the Nigerian DCM as well as continued investor confidence in BUA Cement’s business model, our management team, and long-term strategy, all supported by strong credit ratings. We remain committed to unlocking opportunities within the industry for Nigeria.”

Also commenting, the Chief Executive Officer, BUA Cement, Yusuf Binji, said: “The success of the bond issue underscores the strength of BUA Cement’s brand. The transaction, being the largest corporate bond issuance in the history of Nigeria’s DCM, reiterates the strength and acceptance of BUA Cement’s brand and the trust placed by stakeholders in the company’s strong cash generation capacity, credit profile and strategy driven by a well experienced management team.

He explained that diversifying and extending the duration of their funding sources with the inclusion of this bond, at a competitive rate, would further enable them to achieve their strategic objectives and vision.

“We also have confidence in FMDQ Exchange, hence our decision to list the Bond on the Exchange. BUA Cement is profoundly grateful to the entire transaction parties, the bondholders and the regulators, who have made this become a reality today,” Binji said.
The bond proceeds will be used to refinance existing debt obligations. It will also help the company take collaborative actions to diversify the company’s financing options beyond expensive short term debt.

According to him, the bonds floated by Flour Mill will help to strengthen the company’s capital base and provide the needed working capital required by the Company. He added that Flour Mills Group will continue to deleverage and replace short term financing with longer-tenured and lower price funding to optimize capital structure and reduce financing cost.

On his part, the Group Managing Director of Flour Mills of Nigeria Plc, Mr. Omoboyede Olusanya, said the bonds raised by the company would help to strengthen its capital base and provide the needed working capital. He explained that the Flour Mills of Nigeria would continue to deleverage and replace short term financing with longer-tenured and lower price funding to optimize capital structure and reduce financing.

He added that it would also help the leading food business company to explore diversified funding sources from the Nigerian capital market, with the hope of enhancing growth and the development of the company.

According to Olusanya, Flour Mills of Nigeria will continue to explore opportunities to raise funding via the capital market as this enables the company to diversify its funding sources and continue to play a role in the capital market as a significant player in it.

Speaking on the significance and success of the bond issuance, the Group Managing Director, Emzor Pharmaceuticals, Dr. Stella Okoli, said: “This first-time bond issuance is a fantastic achievement for Emzor and is in line with our commitment to facilitate unlimited wellness by delivering quality and affordable medicines for all. The capital raised will, therefore, drive and accelerate our expansion plans, delivering strong growth and margin improvement. We recognise the efforts of the investor community ensuring the success of this bond issuance and commit to uphold their confidence in us as we deliver on our long- term growth strategy.”

She said Emzor Pharmaceutical had become a household name and continued to establish its footprint as a leading manufacturer of high-quality pharmaceutical and medical consumables in Nigeria. According to the company, that facilitated by lead issuing house, Renaissance Securities (Nigeria) Limited, and joint issuing house, Afrinvest (West Africa) Limited, the debut offering was without a doubt, testament to its growth potential and the level confidence placed on the brand by the investing community.

Commenting on the companies patronage of the bond market, the CEO, Blackstone Capital Limited, Dr. Lizzie Kings-Wali, said corporates are trying to fulfill their debt capital needs before the yield curve begins its upward trend.

“As the interest rate environment changes, corporates are trying to fulfill their debt capital needs before the yield curve peaks. Notably, the low interest rate in 2020 provided unique opportunity for investment grade corporates to raise long term debt capital at historic-low rate, with some Issuers printing 5 and 7 year bonds at low single digit interest rate. Whilst inflationary pressure eased slightly in the past two months, and the steep rise in interest rate has partly moderated the negative real return, there are concerns on further rise in interest rate, especially as Naira remains under pressure. Hence, the current rate environment is still considered benign for debt issues and we hope to see more transactions before year-end,” she said.

According to her, interestingly, the 10-year tax relief on corporate bonds will expire next year, with low probability of its renewal/extension given current fiscal position.

“Thus, corporates seeking to leverage their balance sheet in growing their business may seek to print debt offerings ahead of the expiration of the tax holiday, as the reinstatement of taxes on bond coupons will increase cost of debt to Issuers, given that investors will price in the effective tax and demand a higher tax-equivalent yield on the bonds,” Kings-Wali explained.