EXPERTS PREDICTS BULLISH OUTLOOK FOR CORPORATE BONDS MARKET

BY MICHAEL EBOH
Financial analysts have predicted a lull in the corporate bond market for the remaining part of the year 2011.

According to the analysts at Vetiva Capital Management Limited, a major factor that will account for the bullish posture of the market is the high regulatory charges and stringent listing requirements for the bonds.

Mr. Adedayo Idowu, an analyst at the company, in a report titled: 'The Nigerian Fixed Income Market: Offering Value to Issuers and Investors,' noted that the country's corporate bond market has recorded only five issues between January 2010 and June 2011, with corporate issuances accounting for only 5.6 per cent of total new issuances over the period.

He said, 'Whilst the need for business expansion, investment, and privatization opportunities suggest a need for corporate financing through the bond market (since the apathy to investing in equities remains), challenges such as regulatory charges and listing requirements are disincentives to most companies.

'Furthermore, 'Blue - chip' firms' access to low cost bank debt (11 per cent -12 per cent) compares favorably from an all-in cost standpoint (although the bond market provides longer - term financing).

'These factors support our less bullish outlook for the corporate bond market.'

He further stated that the need for improved financing will be on the increase among the states, noting however, that regulatory demands on debt instruments will increase the cost of financing sub-national bonds, making it unattractive for states to issue new bonds to finance its activities.

'We note that sub-nationals have historically issued five to seven year instruments;' he said, 'and whilst one of the sub-national (Lagos) issuance cleared at 10 per cent (in April 2010), the current yield environment and the outlook for a tighter monetary system, will require a higher premium (100bps - 200bps) on any new issuances to appeal to a competing target market.

'Whilst deposit money banks are expected to gradually ramp up loan creation, which would increase competition for their funds, the PFA's are obligated to invest in Inflation Indexed bonds and are likely to demand a premium, especially on those instruments without an Irrevocable Standing Payment Order (ISPO). T-bills are also likely to continue to command more attractive yields with a lower duration risk. Hence, sub-national financing is likely to be more expensive.'

'Going forward,' Idowu continued, 'we expect sub-national issuances to be subject to keen evaluation and scrutiny based on the credibility of the borrower. Whilst there has been no credit event, investors are likely to be pickier with their investments, especially with the more stringent rules in place for granting liquid asset status to state governments. 'For instance, there is a cap on the amount of debt a sub-national can raise (which is 50 per cent of the revenue generated the previous year). If this regulation is taken more seriously, a large number of states with low Internally Generated Revenue, IGR, will fall short of this requirement.