Nigerian Bank Nigeria Diamond Bank Plc – We Fear For Bonds

Source 234next.com: Daniel Osunkoya, 16 January 2010

Due to the confidence crisis that has besieged the equity market since the second half of 2008, leading to a huge decline of about 90 per cent, market operators fear that a similar fate may befall the currently flourishing bond market in spite of assurances of security.

Many companies, especially the banks, have turned to the bond market to raise funds, since the stock market has become an anathema to the investing public. The Federal and state governments are also not left out, as they attempt to raise money from the market because of the dwindling oil revenues. Some of the banks that recently showed interest in the bond market are First Bank of Nigeria with N500 billion bond issue; United Bank for Africa also with N500 billion bond issue; Zenith Bank preparing to float N300 billion bond; Diamond Bank Plc and Guaranty Trust Bank Plc with N200 billion each.

Two years ago, the stock market was the investors’ delight because they recorded more than 100 per cent capital appreciation on equities and return on investment. Today, over N7 trillion has been lost at the nation’s stock market since the global financial crisis permeated into the Nigerian economy in 2008.

In spite of the downturn recorded in the stock market during this period, the bond market grew in volume and value.
Available data from the Central Securities Clearing System Limited shows that, the volume of transactions in the bond market in 2009, was 16.8 billion units against 10.1 billion units in 2008, an increase of 66.33 per cent; while the value of the bonds increased by 78.43 per cent from N10.2 trillion in 2008 to N18.2 trillion in 2009.

Analysts say if the present rush in the bond market is not checked by the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE), some of the problems that led to the fall of the equity market might also destroy the bonds.

Market operators, who spoke with NEXT on Sunday, called for caution and enforcement of rule.

Okechukwu Unegbu, the chief executive officer of Maxifund Investments and Securities Limited, a stock broking firm, said market regulators “must look into the issue of bonds that is sprouting up now. “I see a problem in the bond market, if we do not do our homework well. The SEC and the NSE have not put any proper guidelines in place in the bond market. They need to look into the sector before we enter another crisis,” Mr Unegbu, the former president of the Chartered Institute of Bankers of Nigeria said. He argued that the issuance of bonds is now following the path of the equities, which led to the collapse of the market. “Regulators must do their analysis well before allowing bonds to be floated in the market, especially corporate bonds; this will guard us against any problem in the future,” he added.
He said corporate bonds must be screened beyond the appetisers and sweeteners they offer.

Ola Yussuff, the chairman of Trust Yield Securities Limited, an investment managing firm, urged the industry regulators to enforce existing regulations and requirements for bonds issue, while also moderating the volume of bonds to be allowed in the capital market at a particular time. “There is no problem if a company wants to come to the bond market, but it should be done in a systematic way such that we don’t end up over flooding the market. Since it is the authority that gives approval for every bond proposal, they must provide a schedule that will ensure that not all the companies that applied are in the market at the same time,” he argued.

“We (market operators) have to learn a lesson from what has happened in the equity market. Everybody was coming to access the equity market, and somewhere along the way, the market was over flooded,” Mr. Yussuff said.

Operators say part of the reasons why the stock market collapsed was because many companies did not adhere to rules of the game. They said initially, when a company successfully raised money from the equity market, the requirement is that the company must wait for two years before it returned to raise fresh funds. “But we know that particular requirement was not strictly adhered to. So many companies came into the market almost on yearly basis, and this also contributed to the collapse of the equity market,” Mr. Yussuff noted.

In spite of operators’ fears, Ndi Okereke-Onyiuke, the director general/chief executive officer of the Stock Exchange told NEXT that the crisis that rocked the equity market “will not happen to the bond because it is a guaranteed fixed instrument, while equity is for speculation.”

Ms. Okereke-Onyiuke explained, “Immediately a bond opens there is a sinking fund that is opened along with it, and the company contributes into the fund every six months for redemption of the bond. By the time the bond matures investors’ money is guaranteed.”

She, however, noted that in some markets, there are no sinking funds which make investment in bonds in such places less secured. “But in our market, and considering the Nigerian environment, there are sinking funds, and we will ensure that no company will tell investors it cannot redeem its obligation,” she said.

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