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By Elisha Bala-Gbogbo
March 24, 2010 12:28AM
(L-R) Accountant General Of Lagos State, Akin Ambode, Lagos State Commissioner for Finance, Rotimi Oyekan, Permanent Secretary in the Ministry, Seyi Williams and Gov. Babatunde Fashola at the Investors forum in Lagos yesterday

Buoyed by the success of the first phase of its fixed bond issue last year, the Lagos State government, led by its governor, Babatunde Raji Fashola, on Tuesday, held an investors forum in Lagos in respect of the Lagos State Fixed Rate Bond (series two, spanning 2010 to 2017).

The N50 billion fixed rate bond series two is under the N277 billion Debt Issuance Programme launched by the Lagos State government as part of ongoing effort to raise capital targeted at achieving the transformation of Lagos into a true mega city backed by modern infrastructures.

Fixed rate bond series
The Lagos fixed bond issue is an attempt by the state government to raise funds to finance infrastructure projects in Lagos. Under this arrangement, the government instituted a N275 billion debt issuance programme where the state bonds are sold in the capital market to raise funds.

Although it is similar to the federal government bonds, it has a slightly longer-term maturity date. The first phase bonds were from 2008 to 2013, while the series two bonds will last for seven years, from 2010 to 2017.

Despite the global economic downturn in 2009, the first phase of the debt issuance programme, which was the N50 billion fixed rate bond, was oversubscribed by N8 billion.

'Our first fixed rate bond issued last year was very successful, even though it was during the global economic crunch,' said Rotimi Oyekan, Lagos State Commissioner of Finance. 'This series two bond issue promises to be better given the amount of liquidity in the system.' Mr. Oyekan made the presentation at the forum, to woo investors to subscribe to the bond.

Bolaji Balogun, Managing Partner of Chapel Hill Advisory Partners Limited, one of the financial advisers to the the debt issuance programme, also shed some light on the structure of the bond.

'Lagos State bonds are secured on the trust security structure; hence, it is more secured.'

Investors' concern
Investors were unanimous in their concern about the level of guarantee the Lagos State fixed rate bond will get the government. But Mr. Fashola was quick to allay any such fears.

'Any time the state's balances come at the end of the month, the deductions are made…I don't have any discretion, I must pay because they have been guaranteed by law already.' Funsho Olusanya, an executive at First Securities Discount House (FSDH), wondered why the state government seem to be cautious with this second series bond issue.

'If the market is awash with liquidity, then we should seek to raise more than N50 billion,' she said.

Also given the magnitude of the issue, investors were keen to know the limit of leverage the state is willing to reach.

'What is the target leverage level the state is ready to tolerate for this phase of the debt issuance programme?' asked Tolu Popoola of the Asset & Resource Management Company (ARM).

In his response, Mr. Oyekan said: 'The first thing we must note is that government has a financial strategy based on three principles: the bond issuance programme, multilateral support, and the public-private partnership. We measure our obligation and we have ceiling of what it should be. As part of our strategy, we're ceiling off debt at 25 percent…with risk recourse factored into it. But basically, before we bring an instrument to you (investors), we have to make sure that it can pay for itself.' The Commissioner's position is further backed by increases in the state's internally generated revenue (IGR). According to Mr. Oyekan, 'IGR grew from N7 billion in June 2008 to N14 billion in January 2009.'

Another concern is the non-availability of a secondary market, in case an investor wants the bond taken off his/her hands. 'Clearing and settlement will not be a problem because the CBN has allowed it to clear and settle like the FGN bonds. So, in terms of trading, these bonds are as good as the FGN bonds…there will be a liquid and active secondary market and this is the first of its kind for a state bond.'

The Lagos State fixed rate bond series programme has the following as joint financial advisers and issuing houses: Chapel Hill Advisory Partners, Afrinvest, Stanbic IBTC Bank, and Skye Financial Services Limited. Others are FBN Capital, FCMB Bank, Radix Capitals Markets, and Zenith Capital.