By Abiola Odutola

 The Nigerian capital market has been in fits of hysteria in the last couple of months and this has adversely chased the bulls back to the forest. This development also affected the inflow of investments, from within and outside the stock market. Consequently, investors have been divesting their funds to other areas they believe could yield better returns. The new attraction appears to be sovereign and sub-national debt instruments like the Federal Government of Nigeria, FGN, bonds and state governments’ bond. For instance, investors staked N422.04 billion on FGN bonds as at September 4, 2009 against N205.89 billion invested in the market last August. Owing to this development, the bond market is now very active, compared to few years back when it was almost dormant.

As at September 9, 2009, transactions at the over-the-counter, OTC, market for FGN bonds showed that investors bought about 383.5 million units, worth N422.04 billion changed hands. While the equity market has been witnessing a slide since June 2009,  32 out of the available 39 bonds were traded as at September 7. According to the Nigerian Stock Exchange, NSE, monthly summary for August 2009, the insignificant increase in the market value of the 308 listed securities was as a result of the influx of new investors that came into the bond market.

The magazine found that the market has been receiving increasing patronage. For instance, the Debt Management Office, DMO, a federal government parastatal, recently issued bonds worth about N1.73 trillion shortly after the debt market was rejuvenated. The agency revealed that

the feat earned the country about 98.72 per cent success rate, with total of N1.708 billion allotted to various bidders within the period.

Market experts attribute the upswing in the bond market to the recent crisis witnessed in the banking sector. Nelson Ireoba, chief investment officer, ProCapital, a stockbroking firm, told the magazine that several investors flee from the stock market due to loss of confidence in the market. “The bond market is becoming attractive with enhanced coupon rate and several governments’ bonds are getting listed now and then. It is a safe haven anytime compared to the stock market,” Ireoba explained. He added that the bond market’s fixed return rate on its initial capital is an advantage it has over stocks which is a source of attraction to any discerning investor.  

Taiwo Oderinde, an investment analyst, believes the bond market is witnessing the growth as a result of improved awareness campaign run by the federal and the state governments to educate the public on the benefit of the market. “We can all see how the Lagos State government has transformed the state of infrastructures in the state with the bond it raised last December. Every investor is interested in what the issuer does with his money and as long as they see proofs with an assurance of getting returns on initial capital, they will subscribe to such stakes without any doubt,” he explained.

Abraham Nwankwo, director-general, DG, DMO, attributes the development to the co-operation of the various regulatory agencies within the financial services industry. According to him, the renewed interest has been aided by the exit

window provided by the NSE OTC secondary market for the FGN bonds traded on the NSE, which ensures liquidity for the bonds. Oderinde said that not all investors hold bonds to maturity, though it is true that their principal is guaranteed if it matured. He explains: “but a bond does not have to be held to maturity. At anytime, a bond can be sold in the open market, where the price fluctuates sometimes dramatically."

Ireoba told the magazine that the benefits inherent in bonds include the exemption from tax and on interest income on the investment. He added that aside from diversifying investment portfolio without increasing risk, the instrument can be used as collateral in other financial transactions. "Bonds are tradable in the secondary market, therefore providing the opportunity of conversion to cash in case of urgent cash needs or possibility of earning a higher yield on investment safety of principal and interest is assured," he said.

Bonds are sovereign and sub-national debt instruments with a guaranteed fixed income, significantly immune from the vagaries of market fluctuations. Funmi Omole, an investor, told the magazine that the initiative of the government to finance domestic debt with issuance of bonds, as against the issuance of treasury bills which are short-term instruments, is a welcome development that would transform the economy if sustained. "The initiative is an excellent complement to the pension reform as the pension fund administrators and custodian would have a huge quantum of funds which are long-term in nature and bonds are natural investment outlet for funds of this nature,” she explained.

However, with the success re

recorded so far in the bond market, some market experts believe the investment potentials in the market are not fully explored. Ndi Okereke-Onyiuke, the DG of the stock exchange, wants the DMO to allow the bonds to be traded on the first-tier equities market like company shares. She says; “This will encourage more transparency and efficient trading in bonds.” But Abiodun Adedipe, an economist, attributes the factor hindering the growth of the market to low level of knowledge on the product and infrastructural requirement. According to him, the bond market can only witness a transformation if more organised private sector, state and local governments emulate the FGN by issuing bonds against short-term instruments like treasury bills.

Similarly, Bunmi Adeyemi, an investor, urges state governments with high internally generated revenue to use the recent oversubscription of Lagos State N50 billion bond as a yardstick to measure the reliability of bond issuance. She believes Lagos State is one of the very few states that have an averagely high contribution of internally-generated revenue to its budgets.  She says; “the attractiveness of the Lagos State bond issue was predicated considerably on the state government's ability to raise internally-generated revenues through which it can offset the redemption of the bonds at maturity,” she explained.

Lagos State government raised a N50 billion bond from the Nigerian capital market last December to enable it pursue its infrastructural development programme within the state. Babatunde Fashola, the state governor, said the bond would enable his government to increase its capacity to delive

deliver infrastructure that would support business in Lagos. Fashola, who said Lagos State has a target of monthly internally-generated revenue of N17.38 billion naira for the current year, declared, "We realised that if it becomes difficult to move goods, services and people from one end of the city to the other, Lagos cannot be said to be a favoured investment destination. It was the same roads that served the state since 1975 that were still there. Therefore, we realised that roads must work, waterways must work and rail transportation must and will work in Lagos, else investors may look elsewhere".

With this development, Adedipe is optimistic that a transformed economy is not far-fetched. “The distortions previously created in the economy through the ensuing mis-matches caused by the use of short-term funding to finance long-term projects would be eliminated. Also, there is bound to be a lengthening of the yield curve in our local markets as bonds between two and 10-year tenures are available in the market as reference points to benchmark applicable yields on other long dated instruments that may be issued," Adedipe added. Findings also revealed that the total value of secondary market transactions in the bond market in eight months exceeds the value of equities traded for the whole of 2006. “We are willing to work with reputable institutions and states that are willing to raise fund from the market,” Okereke-Onyiuke said.